Registration Statement of a Foreign Private Issuer — Form F-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: F-1 Registration Statement of a Foreign Private Issuer 141± 604K
2: EX-5 Opinion re: Legality 5± 18K
3: EX-12 Statement re: Computation of Ratios 2± 12K
4: EX-23 Exhibit 23.1 1 5K
5: EX-23 Exhibit 23.2 1 5K
6: EX-23 Exhibit 23.4 1 5K
F-1 — Registration Statement of a Foreign Private Issuer
Document Table of Contents
As filed with the Securities and Exchange Commission on September 27, 2004
Registration No. 333-[ ]
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SHIP FINANCE INTERNATIONAL LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda 4412 Inapplicable
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation Classification
or organization Code Number)
Par-la-Ville Place,
14 Par-la-Ville Road
Hamilton, HM 08, Bermuda.
(441) 295-9500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Seward & Kissel LLP
Attn: Gary J. Wolfe, Esq.
One Battery Park Plaza
New York, New York 10004 (212) 574-1200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies of communications to:
Kate Blankenship Gary J. Wolfe, Esq.
Ship Finance International Limited Seward & Kissel LLP
Par-la-Ville Place, One Battery Park Plaza
14 Par-la-Ville Road New York, New York 10004
Hamilton, HM 08, Bermuda.
(441) 295-9500
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of each class of to be price per offering registration
securities to be registered registered unit (1) price fee (2)
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Common Shares, par value $1.00 per share 1,600,000 $21.15 $33,840,000 $4,287.53
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(1) Amount of proposed maximum offering price per unit calculated in accordance
with Rule 457(c) based on the average of the high and low price traded on
the New York Stock exchange on September 21, 2004.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933.
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The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay the effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Until the date that is 25 days from the date of this Prospectus, all
dealers that effect transactions in the securities, whether or not participating
in this offering, may be required to deliver a prospectus.
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The information in this prospectus is not complete and may be changed. The
securities to be registered pursuant to this registration statement may not be
sold until the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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Subject to Completion, Dated September __, 2004
PROSPECTUS
1,600,000 Common Shares
SHIP FINANCE INTERNATIONAL LIMITED
Common Shares
This prospectus relates to an aggregate of 1,600,000 common shares of Ship
Finance International Limited that the selling shareholders named in this
prospectus may offer for sale from time to time. These shares were purchased by
the selling shareholders in July, 2004 in an offering of our common shares that
was exempt from the registration requirements of the Securities Act of 1933, as
amended.
We will not receive any of the proceeds from the sale of any of our common
shares by the selling shareholders, but will incur expenses in connection with
the offering. The selling shareholders from time to time may offer and sell the
shares held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. These sales may be made on the New York Stock
Exchange or other national security exchanges on which our common shares are
then traded, in the over-the-counter market, or in negotiated transactions. See
"Plan of Distribution." To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in a
prospectus supplement which will accompany this prospectus. A prospectus
supplement also may add, update or change information contained in this
prospectus.
Our common shares are listed on the New York Stock Exchange under the
symbol "SFL." The last reported sale price on September 24, 2004 was $21.40 per
share.
INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 13 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN OUR
COMMON SHARES.
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NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is September __, 2004
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS......................3
INFORMATION ABOUT THE ENFORCEABILITY OF JUDGMENTS AND THE EFFECT
OF FOREIGN LAW..............................................................3
GLOSSARY OF SHIPPING TERMS.....................................................4
PROSPECTUS SUMMARY.............................................................7
SUMMARY FINANCIAL AND OTHER DATA..............................................11
RISK FACTORS..................................................................13
USE OF PROCEEDS...............................................................19
DIVIDEND POLICY...............................................................19
CAPITALIZATION................................................................19
UNAUDITED PRO FORMA FINANCIAL INFORMATION.....................................20
RATIO OF EARNINGS TO FIXED CHARGES............................................26
SELECTED FINANCIAL INFORMATION AND OTHER DATA.................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................29
INDUSTRY......................................................................44
BUSINESS......................................................................47
MANAGEMENT....................................................................61
COMPENSATION INFORMATION......................................................62
SECURITY OWNERSHIP OF CERTAIN SHAREHOLDERS AND MANAGEMENT.....................62
RELATED PARTY TRANSACTIONS....................................................63
SELLING SHAREHOLDERS..........................................................64
DESCRIPTION OF CAPITAL STOCK..................................................65
DESCRIPTION OF INDEBTEDNESS...................................................66
PLAN OF DISTRIBUTION..........................................................67
LEGAL MATTERS.................................................................69
EXPERTS.......................................................................69
WHERE YOU CAN FIND MORE INFORMATION...........................................69
SHIP FINANCE INTERNATIONAL LIMITED INDEX TO PREDECESSOR COMBINED
CARVE-OUT FINANCIAL STATEMENTS.............................................71
INDEX TO UNAUDITED INTERIM FINANCIAL STATEMENTS.............................F-34
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You should rely only on the information contained in this prospectus. We
and the selling shareholders have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We and the selling
shareholders are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
As used in this prospectus, the terms "Ship Finance International Limited",
"company," "we," "us" and "our" refer only to Ship Finance International Limited
and its subsidiaries, unless the context otherwise requires.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains assumptions, expectations, projections, intentions
and beliefs about future events, in particular under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". These statements are intended as "forward-looking statements." We
may also from time to time make forward-looking statements in our periodic
reports that we will file with the United States Securities and Exchange
Commission, other information sent to our security holders, and other written
materials. We caution that assumptions, expectations, projections, intentions
and beliefs about future events may and often do vary from actual results and
the differences can be material.
All statements in this document that are not statements of historical fact
are forward-looking statements. Forward-looking statements include, but are not
limited to, such matters as:
o future operating or financial results;
o statements about future, pending or recent acquisitions, business
strategy, areas of possible expansion, and expected capital
spending or operating expenses;
o statements about tanker market trends, including charter rates
and factors affecting supply and demand;
o expectations about the availability of vessels to purchase, the
time which it may take to construct new vessels, or vessels'
useful lives; and
o our ability to obtain additional financing.
When used in this document, words such as "believe," "intend,"
"anticipate," "estimate," "project," "forecast," "plan," "potential," "will,"
"may," "should," and "expect" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
We undertake no obligation to publicly update or revise any forward-looking
statements contained in this prospectus, whether as a result of new information,
future events or otherwise, except as required by law. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur, and our actual results could differ materially from
those anticipated in these forward-looking statements.
INFORMATION ABOUT THE ENFORCEABILITY OF JUDGMENTS
AND THE EFFECT OF FOREIGN LAW
We are a Bermuda exempted company and we operate through our vessel owning
subsidiaries located in the Bahamas, the Isle of Man, Liberia, Panama and
Singapore. Our executive offices are located outside of the United States. The
majority of our directors, officers and the experts named in this prospectus
reside outside of the United States. In addition, substantially all of our
assets and the assets of our directors, officers and experts are located outside
of the United States. As a result, you may have difficulty serving legal process
within the United States upon us or on some of these persons.
We have been advised by our Bermuda counsel, Mello, Jones & Martin, that
the United States and Bermuda do not currently have a treaty providing for the
reciprocal recognition and enforcement of judgments obtained in civil and
commercial matters and that there is uncertainty as to whether the courts of
Bermuda would (1) enforce judgments of United States courts obtained against us
or such persons predicated upon the civil liability provisions of the United
States federal or state securities laws or (2) entertain original actions
brought in Bermuda against us or such persons, predicated upon the United States
federal and state securities laws. As a result, it may be difficult for you to
enforce judgments obtained in United States courts against our assets located
outside the United States, and it may be difficult for you to enforce judgments
obtained in United States courts against our directors, officers and experts
that are not in the United States.
INDUSTRY AND MARKET DATA
Some of the industry and market data used throughout this prospectus were
obtained through company research, surveys and studies conducted by third
parties and industry and general publications. We believe that this information
is accurate and accordingly rely on it in this prospectus, however, neither we
nor any of our respective affiliates have undertaken any independent
investigation to confirm the accuracy or completeness of such information. In
addition, some of the shipping industry information, statistics and charts
contained in the section entitled "Industry" have been compiled by P.F. Bass0e
AS & Co. ("P.F. Bass0e"), a leading shipping industry consultant.
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GLOSSARY OF SHIPPING TERMS
The following are definitions of certain terms that are commonly used in
the tanker shipping industry and in this Prospectus.
Aframax tanker. Tanker ranging in size from 80,000 dwt to 120,000 dwt.
Annual survey. The inspection of a vessel pursuant to international conventions,
by a classification society surveyor, on behalf of the flag state, that takes
place every year.
Ballast. A substance, usually water, used to improve the stability and control
the draft of a ship.
Bareboat charter. Charter of a vessel under which the shipowner is usually paid
a fixed amount of charterhire for a certain period of time during which the
charterer is responsible for the operating and voyage costs of the vessel and
for the management of the vessel, including crewing. A bareboat charter is also
known as a "demise charter" or a "time charter by demise."
Bunkers. Heavy fuel oil used to power the engines of a vessel.
Charter. The hire of a vessel for a specified period of time or to carry a cargo
from a loading port to a discharging port. The contract for a charter is called
a charterparty.
Charterer. The company that hires a vessel.
Charterhire. A sum of money paid to the shipowner by a charterer under a charter
for the use of a vessel.
Classification society. An independent society that certifies that a vessel has
been built and maintained according to the society's rules for that type of
vessel and complies with the applicable rules and regulations of the country of
the vessel and the international conventions of which that country is a member.
A vessel that receives its certification from time to time is referred to as
being "in-class."
Contract of Affreightment. A contract for the carriage of a specific type and
quantity of cargo which will be carried in two or more shipments over an agreed
period of time, usually for more than one year.
Demurrage. The delaying of a ship caused by a voyage charterer's failure to take
on or discharge its cargo before the time of scheduled departure. The term is
also used to describe the payment owed by the voyage charterer for such delay.
Double-bottom. Hull construction design in which a vessel has watertight
protective spaces that do not carry any oil and which separate the bottom of
tanks that hold any oil within the cargo tank length from the outer skin of the
vessel.
Double hull. Hull construction design in which a vessel has an inner and outer
side and bottom separated by void space, usually several feet in width.
Double side. Hull construction design in which a vessel has watertight
protective spaces that do not carry any oil and which separate the sides of
tanks that hold any oil within the cargo tank length from the outer skin of the
vessel.
Drydocking. The removal of a vessel from the water for inspection and/or repair
of those parts of a vessel which are below the water line.
Dwt. Deadweight ton. A unit of a vessel's capacity, for cargo, fuel oil, stores
and crew, measured in metric tons of 1,000 kilograms.
Gross ton. Unit of 100 cubic feet or 2.831 cubic meters.
Hull. Shell or body of a ship.
IMO. International Maritime Organization, a United Nations agency that issues
international standards for shipping.
Lightering. To put cargo in a lighter to partially discharge a vessel or to
reduce her draft. A lighter is a small vessel used to transport cargo from a
vessel anchored offshore.
Newbuilding. A new vessel under construction or just completed.
OBO carrier. Oil/bulk/ore carrier. A vessel that is designed to carry either oil
or dry bulk cargoes, such as ores and minerals, coal, grain forest products and
iron/steel products.
Off hire. The period a vessel is unable to perform the services for which it is
immediately required under a time charter. Off hire periods include days spent
on repairs, drydocking and surveys, whether or not scheduled.
OPA. The United States Oil Pollution Act of 1990.
Operating Costs. The costs of operating a vessel that is incurred during a
charter, primarily consisting of crew wages and associated costs, insurance
premiums, lubricants and spare parts, and repair and maintenance costs. For a
time charter or a voyage charter, the shipowner pays operating costs. For a
bareboat charter, the charterer pays operating costs.
Panamax tanker. A tanker of approximately 50,000 to 80,000 dwt. The term is
derived from the maximum length, breadth and draft capable of passing fully
loaded through the Panama Canal.
Petroleum products. Refined crude oil products, such as fuel oils, gasoline and
jet fuel.
Protection and indemnity insurance. Insurance obtained through a mutual
association formed by shipowners to provide liability insurance protection
against large financial loss to one member by contribution towards that loss by
all members.
Scrapping. The disposal of old vessel tonnage by way of sale as scrap metal.
Single hull. Hull construction design in which a vessel has only one hull.
Special survey. The inspection of a vessel by a classification society surveyor
that takes place every four to five years.
Spot market. The market for immediate chartering a vessel, usually for single
voyages.
Suezmax tanker. Tanker ranging in size from 120,000 dwt to 200,000 dwt. The term
is derived from the maximum length, breadth and draft capable of passing fully
loaded through the Suez Canal.
Tanker. Ship designed for the carriage of liquid cargoes in bulk with cargo
space consisting of many tanks. Tankers carry a variety of products including
crude oil, refined products, liquid chemicals and liquid gas.
Time charter. Charter under which the shipowner is paid charterhire on a per day
basis for a certain period of time. The shipowner is responsible for providing
the crew and paying operating costs while the charterer is responsible for
paying the voyage costs. Any delays at port or during the voyages are the
responsibility of the charterer, save for certain specific exceptions such as
off-hire.
Time charter equivalent. A measure of the average daily revenue performance of a
vessel on a per voyage basis determined by dividing net voyage revenues by
voyage days for the applicable time period. For bareboat charters, operating
costs are added to revenues attributable to such charters.
ULCC. Ultra large crude carrier. Tanker that is 320,000 dwt or greater in size.
VLCC. Very large crude carrier. Tanker ranging in size from 200,000 to 320,000
dwt.
Voyage charter. Charter under which a shipowner is paid freight on the basis of
moving cargo from a loading port to a discharge port. The shipowner is
responsible for paying both operating costs and voyage costs. The charterer is
typically responsible for any delay at the loading or discharging ports.
Voyage costs. Bunker costs, port charges and canal dues (or tolls) incurred
during the course of a voyage.
Voyage revenues. Revenues generated from voyage charters and time charters.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
As an investor or prospective investor in our common shares you should read this
entire prospectus carefully, including the section entitled "Risk Factors" and
our financial statements and related notes for a more complete understanding of
our business and this offering. Unless we specify otherwise, all references and
data in this prospectus to our business, our vessels and our fleet refers to our
fleet of 46 vessels and option to purchase one additional vessel that we
acquired in the first quarter of 2004.
Overview
We were formed in October 2003 as a wholly owned subsidiary of Frontline
Ltd. (NYSE: FRO), which we believe is one of the largest owners and operators of
large crude oil tankers in the world. On June 16, 2004 Frontline distributed 25%
of our common shares to its shareholders, with each Frontline shareholder
receiving one of our common shares for every four Frontline shares held. On June
17, 2004, our common shares began trading on the New York Stock Exchange under
the ticker symbol "SFL". On September 24, 2004, Frontline made a further
distribution of approximately 10% of its holdings of our common shares to its
shareholders, with each Frontline shareholder receiving one of our common shares
for every ten Frontline shares held.
We purchased our fleet of 46 crude oil tankers from Frontline, which we
have chartered under long term, fixed rate charters to Frontline Shipping
Limited, a wholly owned subsidiary of Frontline that we refer to as the
Charterer. We also acquired from Frontline an option to purchase one additional
VLCC tanker, which we expect to exercise before the end of 2004. The Charterer
was initially capitalized with $250 million in cash provided by Frontline to
support its obligation to make payments to us under the charters. We have also
entered into fixed rate management and administrative services agreements with
Frontline Management (Bermuda) Ltd., which we refer as Frontline Management,
also a wholly owned subsidiary of Frontline, to provide for the operation and
maintenance of our vessels and administrative support services. These
arrangements are intended to provide us with stable cash flow and reduce our
exposure to volatility in the markets for seaborne oil transportation services.
Our Fleet
The vessels we acquired from Frontline, including the vessel under option,
consist of 23 very large crude carriers, or VLCCs, each having a capacity of
275,000 to 308,000 dwt, and 24 Suezmax tankers, each having a capacity of
142,000 to 169,000 dwt. Our fleet is one of the largest tanker fleets in the
world, with a combined deadweight tonnage of 10.5 million dwt, and has an
average age of 8.6 years as of December 31, 2003. Thirteen of our VLCCs and 16
of our Suezmax tankers are of double hull construction, with the remainder being
modern single hull or double sided vessels built since 1990.
Our tankers primarily transport crude oil. VLCCs, due to their size,
principally operate on routes from the Middle East to the Far East, Northern
Europe, the Caribbean and the Louisiana Offshore Oil Port, or LOOP. Suezmax
tankers are similarly designed for worldwide trade, although the trade for those
vessels is mainly in the Atlantic basin on routes between Northern Europe, the
Caribbean and the United States. Eight of our Suezmax tankers are oil/bulk/ore
carriers, or OBO carriers, which can be configured to carry either oil or dry
cargo as market conditions warrant.
Strategy
Our long term charters with the Charterer are our sole source of operating
income. We currently plan to grow our fleet and to replace vessels as they are
retired with modern double hull vessels to maintain stable cash flow and the
quality of our fleet. We expect that our replacement and growth vessels will be
either existing or newly built VLCC or Suezmax tankers. Depending on market
conditions, we may charter any additional vessels that we acquire on long or
short term time charters or in the spot markets. We may also seek to diversify
our customer base by securing charters with companies other than the Charterer.
Competitive Strengths
We believe that our fleet, together with our contractual arrangements with
Frontline, give us a number of competitive strengths, including:
o one of the largest and most modern VLCC and Suezmax fleets in the
world;
o fixed rate, long term charters intended to reduce our exposure to
volatility in tanker rates;
o profit sharing potential when the Charterer's earnings from
deploying our vessels exceed certain levels;
o substantially fixed operating costs under our management
agreements;
o a charter counterparty initially capitalized with $250 million to
support its obligation to make charter payments to us; and
o vessels managed by Frontline Management, which we believe is one
of the industry's most experienced operators of tankers.
Fleet Purchase Agreement
Pursuant to a fleet purchase agreement executed in December 2003, we
acquired from Frontline 46 vessel owning subsidiaries and one subsidiary that
holds an option to purchase an additional vessel for an aggregate purchase price
of $950 million, excluding working capital and other intercompany balances
retained by Frontline. We also assumed senior secured indebtedness with respect
to our fleet of 46 vessels in the amount of approximately $1.158 billion. The
purchase price for the fleet and the refinancing of the existing senior secured
indebtedness were financed through a combination of the net proceeds from the
sale of $580 million 8.5% senior notes, due 2013, that we issued in December
2003, funds from a $1.058 billion senior secured credit facility and a deemed
equity contribution from Frontline. The charters and the management agreements
were each given economic effect as of January 1, 2004.
Time Charters
We have chartered the vessels that we acquired from Frontline to the
Charter under long term time charters, which will extend for various periods
depending on the age of the vessels, ranging from approximately seven to 23
years.
With certain exceptions, the daily base charter rates, which are payable to
us monthly in advance, for a maximum of 360 days per year (361 days per leap
year), are as follows:
Year VLCC Suezmax
---- ---- -------
2003 to 2006..................................... $25,575 $21,100
2007 to 2010..................................... $25,175 $20,700
2011 and beyond.................................. $24,175 $19,700
These daily base charter rates are subject to reductions after some periods and
to deferral rights that we describe more fully in this prospectus under
"Business-Charter Arrangements."
In addition to the base charter rates, the Charterer has agreed to pay us a
profit sharing payment equal to 20% of its excess revenues, calculated annually
on a time charter equivalent, or TCE, basis, realized by the Charterer for our
fleet above a weighted average rate of $25,575 per day for each VLCC and $21,100
per day for each Suezmax tanker.
The Charterer
The Charterer was initially capitalized by Frontline with $250 million in
cash, which serves to support the Charterer's obligations to make charter
payments to us. The Charterer is entitled to use these funds only (1) to make
charter payments to us and (2) for reasonable working capital to meet short term
voyage expenses. The Charterer's obligations to us under the charters are
secured by a lien over all the assets of the Charterer and a pledge of the
equity interests of the Charterer.
The Charterer is a Bermuda corporation and a wholly owned subsidiary of
Frontline, formed to charter the vessels in our fleet and to engage in matters
necessary or incidental to that business. Under its constituent documents, the
Charterer is not permitted to engage in other businesses or activities and is
required to have at least one independent director on its board of directors
whose consent is required to approve bankruptcy actions and other extraordinary
transactions.
Management and Administrative Services Agreements
To give us added certainty with respect to the costs of operating our
vessels, our vessel owning subsidiaries have entered into fixed rate management
agreements with Frontline Management. Under the management agreements, Frontline
Management is responsible for all technical management of the vessels, including
crewing, maintenance, repair, capital expenditures, drydocking, vessel taxes,
maintaining insurance and other vessel operating expenses. Frontline Management
will also reimburse us for all lost charter revenue caused by our vessels being
off hire for more than five days per year on a fleet-wide basis. Under the
management agreements, we pay Frontline Management a fixed fee of $6,500 per day
per vessel for all of these services, for as long as the relevant charter is in
place. Frontline has guaranteed to us Frontline Management's performance under
these management agreements.
We have also entered into an administrative services agreement with
Frontline Management under which Frontline Management provides us with
administrative support services. We and each of our vessel owning subsidiaries
pay Frontline Management a fixed fee of $20,000 per year for its services under
the agreement, and agree to reimburse Frontline Management for reasonable third
party costs.
Because Frontline Management has assumed full managerial responsibility for
our fleet and our administrative services, we currently do not have management
or employees who are not also officers or employees of Frontline. We have one
independent director, while each of our other directors is also a director or
executive officer of Frontline.
Corporate Structure
The following diagram depicts our ownership and contractual structure:
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Frontline Ltd.
(NYSE:FRO)
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|
|
|
-----------------------------------------------------------
| | |
100% 100% 63.5%
| | |
-------------------- -------------------------- ---------------------
Frontline Management Frontline Shipping Limited Ship Finance
(Bermuda) Ltd. (Charterer) International Limited
(Frontline Managment)
-------------------- -------------------------- ---------------------
^ | |
| | Fixed rate 100%
| | charter payments |
| | -------------
| |---------------------> Vessel Owning
|--------------------------------------------------- Subsidiaries
Fixed payments for vessel management and administration -------------
Our Contractual Cash Flow
The following table sets forth the aggregate contracted charter revenue
that is payable to us under our charters with the Charterer, together with the
management fees that are payable by us under the management agreements and the
administrative services agreement, but does not include any debt service or
other expenses. These figures do not include any profit sharing payments or
reflect charter payment deferrals. These amounts are based on our current fleet
of 46 vessels and include the additional VLCC under option from January 1, 2005.
This table assumes that all parties fully perform their obligations under the
relevant agreements and that none of the charters are terminated due to loss of
the vessel or otherwise, except for the charters for our non-double hull
vessels, which are assumed to be terminated after 2010. Factors beyond our
control may affect other parties' ability to satisfy their contractual
obligations to us, and we cannot assure you that these results will actually be
achieved. These factors may include, among others, a decline in tanker charter
rates that could prevent the Charterer from earning sufficient revenue to
satisfy its obligation to us if the $250 million cash reserve provided by
Frontline is not sufficient to cover any deficiency. Please see "Risk
Factors-Risks Relating to Our Business-We depend on the Charterer for all of our
operating cash flow" and "The Charterer's ability to pay charterhire to us could
be materially and adversely affected by volatility in the tanker markets". For
more complete information about the rates and terms of our charters, please see
"Business-Charter Arrangements".
Net
Management and Contracted
Charter Administrative Cash
Year Payments Fees Payments
---- -------- ---- --------
(dollars in millions)
2004............................... $385.9 $110.9 $275.0
2005............................... 394.1 112.9 281.2
2006............................... 394.1 112.9 281.2
2007............................... 387.3 112.9 274.4
2008............................... 388.4 113.3 275.1
2009............................... 383.0 112.9 270.1
2010............................... 370.4 112.9 257.5
2011............................... 226.6 69.9 156.7
2012............................... 219.4 70.1 149.3
2013............................... 214.1 69.9 144.2
2014 and beyond.................... 1,517.1 496.8 1,020.3
Total.............................. $4,880 $1,495.4 $3,385.0
The Offering
Common shares offered by the selling 1,600,000 common shares
shareholders
Common shares outstanding prior to this 73,925,837 common shares
offering (as of June 30, 2004)
Risk Factors See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully consider
before deciding to invest in our
common shares.
New York Stock Exchange symbol "SFL"
SUMMARY FINANCIAL AND OTHER DATA
The following summary financial and other data summarize our historical
financial information. The summary combined income statement data for the fiscal
years ended December 31, 2003, 2002, and 2001, and the summary combined balance
sheet data with respect to the fiscal years ended December 31, 2003 and 2002
have been derived from our audited predecessor combined carve-out financial
statements included herein. The summary combined balance sheet data with respect
to the fiscal year ended December 31, 2001 has been derived from our audited
predecessor combined carve-out financial statements not included herein.
The summary combined balance sheet data for the six months ended June 30, 2003
has been derived from our unaudited predecessor combined carve-out financial
statements not included herein. The summary combined income statement data for
the six months ended June 30, 2003 has been derived from our unaudited
predecessor combined carve-out financial statements included herein.
The summary financial information as at June 30, 2004 has been derived from our
unaudited standalone financial statements included herein.
In the opinion of our management, the summary financial information for the six
months ended June 30, 2004 and 2003, includes all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of that
information. The summary combined financial data are not necessarily indicative
of future results. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical predecessor combined carve-out financial
statements and the notes thereto and the unaudited interim financial statements
and notes thereto included elsewhere in this registration statement.
[Enlarge/Download Table]
Six month s ended June 30 Year Ended December 31,
-------------------------- -----------------------------------------
2004 2003 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(in thousands of $ except per share data)
Income Statement Data:
Total operating revenues ....... $219,513 $401,589 $695,068 $365,174 $486,655
Net operating income ........... 138,865 227,617 348,816 86,091 230,718
Net income ..................... 106,312 228,958 334,812 18,024 212,010
Earnings per share, basic
and diluted (2).......... $1.44 $3.10 $4.53 $0.24 $2.87
Balance Sheet Data (at end of
period):
Cash and cash equivalents ...... 32,138 25,257 $26,519 $20,634 $26,041
Total assets ................... 2,145,006 2,164,349 2,156,348 2,123,607 1,951,353
Stockholders' equity ........... 564,446 715,615 822,026 485,605 466,742
Cash Flow Data
Cash provided by operating
activities ..................... 109,523 241,912 $415,523 $115,658 $307,167
Cash provided by (used in)
investing activities ........... (7,780) 360 (51,632) (261,779) (271,850)
Cash provided by (used in)
financing activities ........... (69,605) (237,649) (358,006) 140,714 (24,549)
Fleet Data
Number of wholly owned vessels
(end of period) ................ 46 43 43 42 38
Number of vessels owned in joint
ventures (end of period) ....... 0 8 6 9 7
Average Daily Time Charter
Equivalent(1)
VLCCs .......................... $56,600 $47,500 $40,400 $22,200 $34,600
Suezmaxes ...................... $37,100 $40,400 $33,500 $18,400 $30,600
Suezmax OBOs ................... $27,000 $38,700 $32,000 $17,700 $28,900
----------
(1) The Company's vessels are operated under time charters, bareboat charters,
voyage charters pool arrangements and contracts of affreightments, or COAs.
Under a time charter, the charterer pays substantially all of the vessel
voyage costs. Under a bareboat charter the charterer pays substantially all
of the vessel voyage and operating costs. Under a voyage charter, the
vessel owner pays such costs. Vessel voyage costs are primarily fuel and
port charges. Accordingly, charter income from a voyage charter would be
greater than that from an equally profitable time charter to take account
of the owner's payment of vessel voyage costs. In order to compare vessels
trading under different types of charters, it is standard industry practice
to measure the revenue performance of a vessel in terms of average daily
time charter equivalent earnings, or TCEs. For voyage charters, this is
calculated by dividing net voyage revenues by the number of days on
charter. Days spent off-hire are excluded from this calculation. Net voyage
revenues, a non-GAAP measure, provides more meaningful information to us
than voyage revenues, the most directly comparable GAAP measure. Net voyage
revenues are also widely used by investors and analysts in the tanker
shipping industry for comparing financial performance between companies and
to industry averages. The following table reconciles our net voyage
revenues to voyage revenues.
[Enlarge/Download Table]
Six month s ended June 30 Year Ended December 31,
------------------------- --------------------------------
2004 2003 2003 2002 2001
-------- -------- -------- -------- --------
(in thousands of $)
Voyage revenues 49,750 377,126 628,323 324,180 453,784
Voyage expenses and commission (8,971) (80,862) (148,533) (93,996) (75,199)
-------- -------- -------- -------- --------
Net voyage revenues 40,779 296,264 479,790 230,184 378,585
======== ======== ======== ======== ========
(2) For all periods presented per share amounts are based on a denominator of
73,925,837 common shares outstanding which is the number of issued shares
outstanding on June 16, 2004, the date that the Company's shares were
partially spun off. The Company's shares were listed on the New York Stock
Exchange on June 17, 2004.
RISK FACTORS
An investment in our common shares involves a high degree of risk. You
should carefully consider the following risks and other information included in
this prospectus that summarize the risks that may materially affect our business
before making an investment in our common shares.
Risks Relating to Our Business
WE DEPEND ON THE CHARTERER FOR ALL OF OUR OPERATING CASH FLOW.
All of our vessels are chartered to the Charterer under long term time
charters, and the Charterer's payments to us are currently our sole source of
operating cash flow. The Charterer was created to charter our fleet and has no
business or sources of funds other than those related to the chartering of our
fleet to third parties and no assets other than, initially, $250 million in cash
provided by Frontline, which serves to support the Charterer's obligations to
make charter payments to us under the charters. Neither Frontline nor any of its
affiliates guarantees the payment of the charter payments or is obligated to
contribute additional capital to the Charterer at any time.
Although there are restrictions on the Charterer's rights to use its cash
to pay dividends or make other distributions if its cash reserves are below the
specified minimum reserve requirement, the Charterer is permitted to use its
cash reserves to pay charter payments to us and for reasonable working capital
purposes. Accordingly, at any given time in the future, its cash reserves may be
diminished or exhausted, and we cannot assure you that the Charterer will be
able to make charter payments to us. If the Charterer is unable to make charter
payments to us, our results of operations and financial condition will be
materially adversely affected.
VOLATILITY IN THE TANKER CHARTER MARKETS MAY CAUSE THE CHARTERER TO BE UNABLE TO
MAKE CHARTERHIRE PAYMENTS TO US.
The Charterer subcharters our vessels to end users under long term time
charters, on the spot charter market, or under contracts of affreightment under
which our vessels carry an agreed upon quantity of cargo over a specified route
and time period. As a result, it is directly exposed to the risk of volatility
in tanker charter rates. Tanker charter rates have historically fluctuated
significantly based upon many factors, including:
o global and regional economic and political conditions;
o changes in production of crude oil, particularly by OPEC and
other key producers;
o developments in international trade;
o changes in seaborne and other transportation patterns, including
changes in the distances that cargoes are transported;
o environmental concerns and regulations;
o weather; and
o competition from alternative sources of energy.
Tanker charter rates also tend to be subject to seasonal variations, with
demand (and rates) normally higher in winter months.
The Charterer's successful operation of our vessels in the tanker charter
market will depend on, among other things, its ability to obtain profitable
tanker charters. We cannot assure you that future tanker charters will be
available to the Charterer at rates sufficient to enable the Charterer to meet
its obligations to pay charterhire to us.
THE MAJORITY OF OUR COMMON SHARES ARE OWNED BY FRONTLINE AND WE DEPEND ON
OFFICERS AND DIRECTORS OF FRONTLINE FOR OUR MANAGEMENT, WHICH MAY CREATE
CONFLICTS OF INTEREST.
Frontline currently owns 63.5% of our common shares. For so long as
Frontline owns at least a majority of our outstanding common shares, it will
generally be able to control the outcome of any shareholder vote, including the
election of directors. We do not have any employees or officers who are not
employees or officers of Frontline. Although we do have one independent
director, all of our other directors are directors or executive officers of
Frontline. These directors owe fiduciary duties to the shareholders of each
company and may have conflicts of interest in matters involving or affecting us
and Frontline, including matters arising under our agreements with Frontline and
its affiliates. In addition, due to their ownership of Frontline common shares,
some of these individuals may have conflicts of interest when faced with
decisions that could have different implications for Frontline than they do for
us. We cannot assure you that any of these conflicts of interest will be
resolved in our favor.
THE AGREEMENTS BETWEEN US AND FRONTLINE AND ITS OTHER AFFILIATES MAY BE LESS
FAVORABLE THAN AGREEMENTS THAT WE COULD OBTAIN FROM UNAFFILIATED THIRD PARTIES.
The charters, the management agreements, the charter ancillary agreement
and the other contractual agreements we have with Frontline and its other
affiliates were made in the context of an affiliated relationship and were
negotiated in arms length transactions. The negotiation of these agreements may
have resulted in prices and other terms that are less favorable to us than terms
we might have obtained in arm's length negotiations with unaffiliated third
parties for similar services.
FRONTLINE'S OTHER BUSINESS ACTIVITIES MAY CREATE CONFLICTS OF INTEREST WITH
FRONTLINE.
While Frontline has agreed to cause the Charterer to use its commercial
best efforts to employ our vessels on market terms and not to give preferential
treatment in the marketing of any other vessels owned or managed by Frontline or
its other affiliates, it is possible that conflicts of interests in this regard
will adversely affect us. Under our charter ancillary agreement with the
Charterer and Frontline, we are entitled to receive annual profit sharing
payments to the extent that the average TCE rates realized by the Charterer
exceed specified levels. Because Frontline also owns or manages other vessels in
addition to our fleet, which are not included in the profit sharing calculation,
conflicts of interest may arise between us and Frontline in the allocation of
chartering opportunities that could limit our fleet's earnings and reduce our
profit sharing payments or charter payments under our charters.
OUR SHAREHOLDERS MUST RELY ON US TO ENFORCE OUR RIGHTS AGAINST OUR CONTRACT
COUNTERPARTIES.
Holders of our common shares and other securities will have no direct right
to enforce the obligations of the Charterer, Frontline Management or Frontline
under the charters and related agreements, the Frontline performance guarantee
or the management agreements with Frontline Management. Accordingly, if any of
those counterparties were to breach their obligations to us under any of these
agreements, our shareholders would have to rely on us to pursue our remedies
against those counterparties. Some of these breaches may constitute an event of
default under the indenture for our 8.5% Senior Notes until we complete a
successful public listing. We will be deemed to have completed a successful
public listing when Frontline has distributed at least 40% of our common shares.
IF OUR CHARTERS OR MANAGEMENT AGREEMENTS TERMINATE, WE COULD BE EXPOSED TO
INCREASED VOLATILITY IN OUR BUSINESS AND FINANCIAL RESULTS.
If any of our charters terminate, it is unlikely that we would be able to
re-charter these vessels on a long term basis with terms similar to the terms of
our charters with the Charterer. While the terms of our current charters end
between 2014 and 2025, the Charterer has the option to terminate the charters of
our non double hull vessels in 2010. One or more of the charters with respect to
our vessels may also terminate in the event of a requisition for title or a loss
of a vessel. We may acquire additional vessels in the future and we cannot
assure you that we will be able to enter into similar charters with the
Charterer or with a third party charterer. In addition, under our vessel
management agreements with Frontline Management, for a fixed management fee
Frontline Management is responsible for all of the technical and operational
management of our vessels, and will indemnify us against certain losses of hire
and various other liabilities relating to the operation of the vessels. Our
current management agreements with Frontline Management may be terminated if the
relevant charter is terminated. If our management agreements with Frontline
Management were to terminate or we were to acquire additional vessels in the
future, we do not believe we could obtain similar fixed rate terms from an
independent third party.
With respect to any vessels we acquire that are not subject to the charter
and management agreements with the Charterer and Frontline Management, we will
be directly exposed to all of the operational and other risks associated with
operating our vessels as described in these risk factors. As a result, our
future cash flow could be more volatile and we could be exposed to increases in
our vessel operating expenses, each of which could materially and adversely
affect our results of operations and business.
AN INCREASE IN INTEREST RATES COULD MATERIALLY AND ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE.
We have outstanding approximately $971.5 million in floating rate debt
under a senior secured credit facility as of the date of this prospectus.
Although we use interest rate swaps to manage our interest rate exposure from a
portion of our floating rate debt, if interest rates rise, interest payments on
our floating rate debt that we have not swapped into effectively fixed rates
would increase. As of August 31, 2004 we have entered into interest rate swaps
to fix the interest on $586.4 million of our outstanding indebtedness. An
increase in interest rates could cause us to incur additional costs associated
with our debt service which may materially and adversely affect our results of
operations. Our maximum exposure to interest rate fluctuations is $385.1 million
at August 31, 2004. A one per cent change in interest rates would increase or
decrease interest expense by $3.9 million per year as of August 31, 2004.
BECAUSE WE ARE A NEW COMPANY WITH NO SEPARATE OPERATING HISTORY, OUR HISTORICAL
FINANCIAL AND OPERATING DATA WILL NOT BE REPRESENTATIVE OF OUR FUTURE RESULTS.
We were formed in October 2003 and commenced operations in January 2004.
Prior to commencing operations we did not have any operating history separate
from Frontline's. The predecessor combined carve-out financial statements
included in this prospectus have been prepared on a carve-out basis and reflect
the historical business activities of Frontline relating to our vessel owning
subsidiaries. These predecessor financial statements do not reflect the results
we would have obtained under our current fixed rate long term charters and
management agreements and therefore are not a meaningful representation of our
future results of operations.
WE ARE HIGHLY LEVERAGED AND SUBJECT TO RESTRICTIONS IN OUR FINANCING AGREEMENTS
THAT IMPOSE CONSTRAINTS ON OUR OPERATING AND FINANCING FLEXIBILITY.
We have significant indebtedness outstanding and have significant principal
amortization requirements during the term of our 8.5% Senior Notes. We may need
to refinance some or all of our indebtedness on maturity of our senior notes but
we cannot assure you we will be able to do so. We may incur additional debt in
the future, subject to limitations under our credit facilities and the indenture
for our Senior Notes. These limitations include:
o limitations on our incurrence of additional indebtedness,
including our issuance of additional guarantees;
o limitations on our incurrence of liens; and
o limitations on our ability to pay dividends.
o For more detailed descriptions of these limitations, please see
"Description of Other Indebtedness".
Our debt service obligations require us to dedicate a substantial portion
of our cash flow from operations to required payments on indebtedness and could
limit our ability to obtain additional financing in the future for capital
expenditures, acquisitions, and other general corporate activities. It also may
limit our flexibility in planning for, or reacting to, changes in our business
and the shipping industry or detract from our ability to successfully withstand
a downturn in our business or the economy generally and place us at a
competitive disadvantage against other less leveraged competitors.
AN ACCELERATION OF THE CURRENT PROHIBITION TO TRADE DEADLINES FOR OUR NON-DOUBLE
HULL TANKERS COULD ADVERSELY AFFECT OUR OPERATIONS.
Our tanker fleet includes 18 non-double hull tankers. The United States,
the European Union and the International Maritime Organization, or the IMO, have
all imposed limits or prohibitions on the use of these types of tankers in
specified markets after certain target dates, which range from 2010 to 2015. The
sinking of the single hull m.t. Prestige offshore Spain in November 2002 has led
to proposals by the European Union and the IMO to accelerate the prohibition to
trade of all non-double hull tankers, with certain limited exceptions. In
December 2003, the Marine Environmental Protection Committee of the IMO adopted
a proposed amendment to the International Convention for the Prevention of
Pollution from Ships to accelerate the phase out of single hull tankers from
2015 to 2010 unless the relevant flag states extend the date to 2015. This
proposed amendment will take effect in April 2005 unless objected to by a
sufficient number of states. We do not know whether any of our vessels will be
subject to this accelerated phase-out, but this change could result in a number
of our vessels being unable to trade in many markets after 2010. Moreover, the
IMO may still adopt regulations in the future that could adversely affect the
useful lives of our non-double hull tankers as well as our ability to generate
income from them.
COMPLIANCE WITH SAFETY, ENVIRONMENTAL AND OTHER GOVERNMENTAL AND OTHER
REQUIREMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
The shipping industry is affected by numerous regulations in the form of
international conventions, national, state and local laws and national and
international regulations in force in the jurisdictions in which such tankers
operate, as well as in the country or countries in which such tankers are
registered. These regulations include the U.S. Oil Pollution Act of 1990, or
OPA, the International Convention on Civil Liability for Oil Pollution Damage of
1969, International Convention for the Prevention of Pollution from Ships, the
IMO International Convention for the Safety of Life at Sea of 1974, or SOLAS,
the International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002. In addition, vessel classification
societies also impose significant safety and other requirements on our vessels.
We believe our tankers are maintained in good condition in compliance with
present regulatory and class requirements relevant to areas in which they
operate, and are operated in compliance with applicable safety/environmental
laws and regulations.
However, regulation of tankers, particularly in the areas of safety and
environmental impact may change in the future and require significant capital
expenditures be incurred on our vessels to keep them in compliance.
WE MAY INCUR LOSSES WHEN WE SELL VESSELS, WHICH MAY ADVERSELY AFFECT OUR
EARNINGS.
The market value of our vessels will change depending on a number of
factors, including general economic and market conditions affecting the shipping
industry, competition, cost of vessel construction, governmental or other
regulations, prevailing levels of charter rates, and technological changes.
During the period a vessel is subject to a charter with the Charterer, we will
not be permitted to sell it to take advantage of increases in vessel values
without the Charterer's agreement. On the other hand, if the Charterer were to
default under the charters due to adverse conditions in the tanker market,
causing a termination of the charters, it is likely that the fair market value
of vessels would be depressed in such market conditions. If we were to sell a
vessel at a time when vessel prices have fallen, we could incur a loss and a
reduction in earnings.
OUR BUSINESS HAS INHERENT OPERATIONAL RISKS, WHICH MAY NOT BE ADEQUATELY COVERED
BY INSURANCE.
Our tankers and their cargoes are at risk of being damaged or lost because
of events such as marine disasters, bad weather, mechanical failures, human
error, war, terrorism, piracy and other circumstances or events. In addition,
transporting crude oil across a wide variety of international jurisdictions
creates a risk of business interruptions due to political circumstances in
foreign countries, hostilities, labor strikes and boycotts, the potential for
changes in tax rates or policies, and the potential for government expropriation
of our vessels. Any of these events may result in loss of revenues, increased
costs and decreased cash flows to the Charterer, which could impair its ability
to make payments to us under our charters.
In the event of a casualty to a vessel or other catastrophic event, we will
rely on our insurance to pay the insured value of the vessel or the damages
incurred. Under the management agreements, Frontline Management is responsible
for procuring insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include marine hull
and machinery insurance, protection and indemnity insurance, which includes
pollution risks and crew insurances and war risk insurance. Currently, the
amount of coverage for liability for pollution, spillage and leakage available
to us on commercially reasonable terms through protection and indemnity
associations and providers of excess coverage is $1 billion per vessel per
occurrence. We cannot assure you that we will be adequately insured against all
risks. Frontline Management may not be able to obtain adequate insurance
coverage at reasonable rates for our fleet in the future. Additionally, our
insurers may refuse to pay particular claims. Any significant loss or liability
for which we are not insured could have a material adverse effect on our
financial condition.
MARITIME CLAIMANTS COULD ARREST OUR TANKERS, WHICH COULD INTERRUPT THE
CHARTERER'S OR OUR CASH FLOW.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that vessel
for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien
holder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt the Charterer's or our cash flow and require us to pay a significant
amount of money to have the arrest lifted. In addition, in some jurisdictions,
such as South Africa, under the "sister ship" theory of liability, a claimant
may arrest both the vessel which is subject to the claimant's maritime lien and
any "associated" vessel, which is any vessel owned or controlled by the same
owner. Claimants could try to assert "sister ship" liability against one vessel
in our fleet for claims relating to another vessel in our fleet.
AS OUR FLEET AGES, THE RISKS ASSOCIATED WITH OLDER TANKERS COULD ADVERSELY
AFFECT OUR OPERATIONS.
In general, the costs to maintain a tanker in good operating condition
increase as the tanker ages. Due to improvements in engine technology, older
tankers typically are less fuel-efficient than more recently constructed
tankers. Cargo insurance rates increase with the age of a tanker, making older
tankers less desirable to charterers.
Governmental regulations, safety or other equipment standards related to
the age of tankers may require expenditures for alterations or the addition of
new equipment to our tankers to comply with safety or environmental laws or
regulations that may be enacted in the future. These laws or regulations may
also restrict the type of activities in which our tanker may engage or the
geographic regions in which they may operate. We cannot predict what alterations
or modifications our vessels may be required to undergo in the future or that as
our tankers age, market conditions will justify any required expenditures or
enable us to operate our tankers profitably during the remainder of their useful
lives.
THERE MAY BE RISKS ASSOCIATED WITH THE PURCHASE AND OPERATION OF SECONDHAND
TANKERS.
Our current business strategy includes additional growth through the
acquisition of secondhand tankers. Although we will inspect secondhand tankers
prior to purchase, this does not normally provide us with the same knowledge
about their condition that we would have had if such tankers had been built for
and operated exclusively by us. Therefore, our future operating results could be
negatively affected if some of the tankers do not perform as we expect. Also, we
do not receive the benefit of warranties from the builders if the tankers we buy
are older than one year.
IF FRONTLINE WERE TO BECOME INSOLVENT, A BANKRUPTCY COURT COULD POOL OUR OR THE
CHARTERER'S ASSETS AND LIABILITIES WITH THOSE OF FRONTLINE UNDER THE EQUITABLE
DOCTRINE OF SUBSTANTIVE CONSOLIDATION.
Under United States bankruptcy law, the equitable doctrine of substantive
consolidation can permit a bankruptcy court to disregard the separateness of
related entities and to consolidate and pool the entities' assets and
liabilities and treat them as though held and incurred by one entity where the
interrelationship among the entities warrants such consolidation. Substantive
consolidation is an equitable remedy in bankruptcy that results in the pooling
of assets and liabilities of a debtor with one or more of its debtor affiliates
or, in rare circumstances, non-debtor affiliates, for the purposes of
administering claims and assets of creditors as part of the bankruptcy case,
including treatment under a reorganization plan.
Not all jurisdictions that could potentially have jurisdiction over an
insolvency or bankruptcy case involving Frontline, us, and/or any of our
respective affiliates recognize the substantive consolidation doctrine. For
example, we have been advised by our Bermuda counsel that Bermuda does not
recognize this doctrine. However, if Frontline or its creditors were to assert
claims of substantive consolidation or related theories in a Frontline
bankruptcy proceeding in a jurisdiction that recognizes the doctrine of
substantive consolidation, such as the United States, the bankruptcy court could
make our assets or the Charterer's assets available to satisfy Frontline
obligations to its creditors. This could have a material adverse effect on us.
WE ARE A HOLDING COMPANY, AND WE DEPEND ON THE ABILITY OF OUR SUBSIDIARIES TO
DISTRIBUTE FUNDS TO US IN ORDER TO SATISFY OUR FINANCIAL AND OTHER OBLIGATIONS.
We are a holding company, and have no significant assets other than the
equity interests in our subsidiaries. Our subsidiaries own all of our vessels,
and payments under our charter agreements with the Charterer will be made to our
subsidiaries. As a result, our ability to make required payments on the notes
depends on the performance of our subsidiaries and their ability to distribute
funds to us. If we are unable to obtain funds from our subsidiaries, we will not
be able to pay interest or principal on the notes when due, or to redeem the
notes upon a change of control, unless we obtain funds from other sources. We
cannot assure you that we will be able to obtain the necessary funds from other
sources.
USE OF PROCEEDS
Our common shares being offered by this prospectus are solely for the
account of the selling shareholders. We will not receive any proceeds from the
sale of our common shares by the selling shareholders. The selling shareholders
will pay brokerage fees, selling commission and underwriting discounts, if any
incurred in connection with disposing of the shares pursuant to this prospectus.
We will bear all other costs, fees and expenses incurred in effecting the
registration of the shares covered by this prospectus.
DIVIDEND POLICY
Any determination to pay dividends will be at the sole discretion of our
Board of Directors and will be dependant on, among other factors, our earnings,
financial condition, operating results, capital requirements, regulatory
restrictions, and contractual restrictions imposed by our debt instruments.
Although we cannot assure you that any dividends will be declared or paid in the
future, our Board of Directors has determined to establish a targeted
sustainable long-term dividend yield at $1.40 per common share.
We also account for certain payments as deemed dividends (see Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus).
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2004 and as
adjusted to reflect:
1. Our repurchase of $5.0 million of our 8.5% Senior Notes in July,
2004;
2. The repayment of an instalment of $22.8 million on our senior
secured credit facility in August 2004;
3. Our issuance of 1,600,000 new common shares for net proceeds of
$25.2 million in July 2004; and
4. A dividend of $0.35 per share declared on August 19, 2004.
The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our interim financial statements and predecessor combined
carve-out financial statements together with the notes thereto, included in this
prospectus.
[Enlarge/Download Table]
June 30, 2004
---------------------------------------------
Actual As Adjusted
---------------------- ---------------------
(dollars in millions) (dollars in millions)
Long-term debt including current portion:
8.5% Senior Notes due 2013 (1) $560.0 $555.0
Senior secured credit facility 994.3 971.5
Total debt 1,554.3 1,526.5
------- -------
Stockholders' equity 564.4 563.7
------- -------
Total capitalization $2,118.7 $2,090.2
======== ========
(1) Represents the issued amount of $580 million less $20 million repurchased
as at June 30, 2004.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statements of operations for the six months ended
June 30, 2004 and year ended December 31, 2003 gives effect to the following
events as if they had occurred on and from January 1, 2004 and January 1, 2003
respectively.
o Our purchase from Frontline of our subsidiaries that own a fleet
of 46 crude oil tankers and an option to acquire the vessel
Oscilla, which assumes the exercise of our option to acquire the
vessel Oscilla
o The charter by us of the fleet to the Charterer under long term
fixed rate charters.
o Our entry into the charter ancillary agreement with the
Charterer.
o Our entry into the vessel management agreements and the
administrative services agreement with Frontline Management.
o The refinancing of our subsidiaries' existing senior secured
indebtedness.
o Our issuance of $580 million of 8.5% Senior Notes due 2013.
The unaudited pro forma financial information is provided for illustrative
purposes only and does not represent what our statements of operations would
actually have been if the transactions had in fact occurred on those dates and
is not representative of our results of operations for any future periods.
Investors are cautioned not to place undue reliance on this unaudited pro forma
financial information.
The footnotes to the pro forma financial information contain a more
detailed discussion of how adjustments to reflect the events described above are
presented. The unaudited pro forma statements of operations should be read in
conjunction with our interim financial statements, our predecessor combined
carve-out financial statements and stand-alone financial statements and the
related notes and other financial information included elsewhere in this
prospectus. The historical statement of operations for the six months ended June
30, 2004 is derived from our interim financial statements included elsewhere in
this prospectus. The historical statement of operations for year ended December
31, 2003 is derived from the stand alone statement of operations included
elsewhere in this prospectus.
Ten of the 46 vessels we have purchased from Frontline are currently under
bareboat or time charter to third parties. Four of our existing charter
arrangements will expire prior to December 31, 2004 and the remainder will
expire on or before December 31, 2007 subject to charterer's options to extend
some of these charters. We also acquired from Frontline an option to purchase
one additional VLCC tanker, the Oscilla, which we expect to exercise before the
end of 2004. This vessel is currently under a variable rate bareboat charter to
a third party until March 30, 2005.
The cash flow obligations from our charters with the Charterer became
effective as of January 1, 2004; however, we have not reflected any change in
the status of the current charter arrangements with third parties for those that
expire after September 30, 2004 in the pro forma statements of operations. We
account for 38 of the long-term charters to the Charterer as sales type leases
under U.S. GAAP in the unaudited pro-forma statement of operations. The
remaining 8 vessels and Oscilla are currently accounted for as chartered under
operating leases. We refer you to footnote A to the unaudited pro forma
statements of operations for further information regarding the lease
classification of our charters. Classification of charters as sales type leases
or as operating leases is determined with reference to, among other things,
assumptions about useful lives, fair values on January 1, 2004 and scrap values
of our vessels. The lease classification of our charters for the purposes of
preparing this unaudited pro forma financial information is based on assumptions
that reflect our best estimates and reasonably available information.
The following table summarizes our key assumptions about fair values on
January 1, 2004, useful lives and scrap values of our fleet, including the VLCC
we have an option to purchase, which we use in classifying our charters as
operating leases or sales type leases. Fair values of vessels are generally
estimated using the average of three independent broker valuations (which assume
a sale between a willing buyer and a willing seller under no compulsion to
sell).
[Enlarge/Download Table]
Average of Average of
Number of Dates of Estimated estimated fair estimated scrap
Type of vessel vessels construction scrapping dates values values
-------------- --------- ------------ --------------- -------------- ---------------
(dollars in millions)
Double hull Suezmax OBO 8 1991 to 1992 2016 to 2017 $34.8 $2.4
Double hull Suezmax 8 1993 to 1998 2018 to 2023 $44.6 $3.3
Non-double hull Suezmax 8 1991 to 1993 2015 to 2017 $24.6 $3.0
Double hull VLC 13 1998 to 2002 2023 to 2027 $79.3 $6.0
Non-double hull VLCC 10 1990 to 1996 2015 to 2017 $34.7 $4.2
Unaudited Pro Forma Statement of Operations for the Six months Ended June 30,
2004
[Enlarge/Download Table]
Pro forma
Actual Adjustments Notes Pro forma
------ ----------- ----- ---------
Operating revenues
Time, bareboat and voyage charter revenues 121,975 (67,983) A 53,992
Finance lease interest income 64,056 16,005 A 80,061
Finance lease service revenues 33,482 6,740 A 40,222
------- --------
Total operating revenues 219,513 174,275
------- --------
Operating expenses
Voyage expenses and commission 8,971 (7,726) B 1,245
Ship operating expenses 48,377 224 B 48,601
Depreciation and amortisation 21,786 (9,556) C 12,230
Administrative expenses 1,514 D 1,514
------- --------
Total operating expenses 80,648 63,590
------- --------
Net operating income 138,865 110,685
Other income (expenses)
Interest income 2,269 2,269
Interest expense (48,929) (612) E (49,736)
(548) F
(353) G
Foreign currency exchange gain 117 117
Other financial items, net 13,990 13,990
------- --------
Net other income (expenses) (32,553) (33,360)
------- --------
Net income (loss) 106,312 77,325
======= ========
Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2003
[Enlarge/Download Table]
Pro forma
Actual Adjustments Notes Pro forma
------ ----------- ----- ---------
Operating revenues
Time, bareboat and voyage charter revenues - 121,470 A 121,470
Finance lease interest income - 168,010 A 168,010
Finance lease service revenues - 80,665 A 80,665
------- --------
Total operating revenues - 370,145
------- --------
Operating expenses
Voyage expenses and commission - 17,988 B 17,988
Ship operating expenses - 97,273 B 97,273
Depreciation and amortisation - 24,026 C 24,026
Administrative expenses 14 960 D 974
------- --------
Total operating expenses 14 140,261
------- --------
Net operating income (14) 229,884
Other income (expenses)
Interest income 199 199
Interest expense (2,123) (25,723) E (79,650)
(47,931) F
(3,873) G
------- --------
Net other income (expenses) (1,924) (79,451)
------- --------
Net income (loss) (1,938) 150,433
======= ========
Notes to Adjustments to Unaudited Pro Forma Statements of Operations
A. We have chartered all of the 46 vessels we acquired from Frontline to
the Charterer under long term charters. Ten of these vessels are currently
under charter to third parties. We refer you to the introduction to this
section and to "Business--Our Fleet" in this prospectus for key information
regarding the vessels that we acquired and chartered to the Charterer.
Thirty eight of these vessels have completed or will complete their current
voyage or time charter prior to September 30, 2004 and are assumed to be
free and available as of January 1, 2004 and January 1, 2003 for the
purposes of this unaudited pro forma financial information. Charters of
these vessels have been accounted for as sales type leases and our net
investment in the lease is recorded at the inception of the lease. For
sales type leases, we will remove the depreciated cost of the associated
vessel from our balance sheet and record a net investment in sales type
leases. The net investment in a sales type lease is calculated as the sum
of the net present values of the minimum lease cash flows, calculated at
the inception of the lease.
Lease cash flows from sales type leases, net of executory costs, are
allocated between finance lease interest income, finance lease service
revenues and a reduction in the balance of the net investment in a manner
that results in a constant periodic return based on the reducing balance of
the net investment.
For the purposes of this unaudited pro forma financial information the
remaining eight vessels and Oscilla will be classified as chartered under
operating leases in accordance with U.S. GAAP. These eight vessels and
Oscilla are currently on charters that end after September 30, 2004 and are
therefore assumed by us to be not free and available as of January 1, 2004
and January 1, 2003.
Lease cash flows from operating leases are recorded wholly as revenues. For
these vessels, including Oscilla, pro forma charter revenues reflect the
rates due under existing charter arrangements. These charters will be
accounted for as operating leases until the expiration of the existing
charters.
As the economic effect of the new charters to the Charterer took effect
January 1, 2004, we pay to or receive from the Charterer the difference
between the new charter rates and the underlying charter rates until
vessels complete their current charter arrangements. These payments are
recorded as deemed dividends in our statements of changes in stockholders'
equity and are therefore not reflected in this unaudited pro-forma
financial information.
As the remaining 8 vessels and Oscilla complete their current charter
arrangements, actual operating revenues will change as the current charters
are on different rates than those that will be in effect after entering
into the new lease arrangements with the Charterer. As such, the pro forma
financial information does not reflect such future effect of the completion
of the current charters.
Under the provisions of the lease agreements, the Charterer has exercised
its option to lease four of the vessels from us under bareboat charters and
pay us a charter rate that is reduced by $6,500 per day in comparison with
the equivalent time charter rates. Under a bareboat charter, we do not
provide services to the Charterer as provided under an equivalent time
charter and accordingly we do not receive revenues from services under a
bareboat charter. Revenues from services are reported as finance lease
service revenues in our statement of operations. Additionally, we do not
incur the corresponding management fee expenses of $6,500 per day for those
four vessels as are incurred by us for vessels leased under time charters.
Management fee expenses are reported as ship operating expenses. See also
pro forma adjustment B.
Current charter arrangements for the eight vessels on charters expiring
after September 30, 2004 expire as follows:
Period of charter expiration Number of vessels
---------------------------- -----------------
October 1, 2004 to December 31, 2004 2
January 1, 2005 to December 31, 2005 0
January 1, 2006 to December 31, 2006 5
January 1, 2007 to December 31, 2007 1
-----------------
Total 8
The pro forma adjustments for the six months ended June 30, 2004 are calculated
as follows:
Six months
ended June
30, 2004
----------
Adjustment to eliminate historical
revenues from vessels that will be
chartered to the Charterer by September
30, 2004 under sales type leases $(76,428)
Adjustment to recognize estimated
revenues from Oscilla from January 1, 2004 8,445
--------
Total pro forma adjustment $(67,983)
========
Adjustment to recognize finance lease
interest income from charters accounted
for as sales type leases 16,005
--------
Total pro forma adjustment $16,005
========
Adjustment to recognize finance lease
service revenues from charters accounted
for as sales type leases 6,740
--------
Total pro forma adjustment $6,740
========
The pro forma adjustments for the year ended December 31, 2003 are calculated as
follows:
Year ended
December 31,
2003
------------
Adjustment to recognize historical
revenues from eight vessels currently
chartered under operating type leases $108,739
Adjustment to recognize estimated
revenues from acquisition of Oscilla
from January 1, 2003 12,731
--------
Total pro forma adjustment $121,470
========
Adjustment to recognize finance lease
interest income from charters accounted
for as sales type leases 168,010
--------
Total pro forma adjustment $168,010
========
Adjustment to recognize finance lease
service revenues from charters accounted
for as sales type leases 80,665
--------
Total pro forma adjustment $80,665
========
In addition to the charters to the Charterer which are given effect in this
unaudited pro forma financial information, we have entered into a profit sharing
agreement with the Charterer. Under the terms of this agreement, beginning with
the final 11-month period in 2004 and for each calendar year thereafter, the
Charterer has agreed to pay us a profit sharing payment equal to 20% of the
charter revenues for the applicable period, calculated and paid annually in
arrears on a TCE basis, realized by the Charterer from their use of our fleet in
excess of a weighted average rate of $25,575 per day for each VLCC and $21,100
per day for each Suexmax tanker. We have assumed that there would be no profit
sharing payments made to us in the 2003 pro-forma statement of operations and no
adjustment has been made to this pro forma financial information to reflect any
effect of this arrangement. Our interim financial statements for the six months
ended June 30, 2004 include profit sharing revenues of $5.7 million.
B. This adjustment is to recognize voyage expenses and ship operating expenses
for the 46 vessels we acquired and the exercise of our option to aquire the
vessel Oscilla and to reflect the $6,500 per day per vessel that we pay under
the vessel management agreements in the pro-forma statement of operations for
the year ended December 31, 2003 and to eliminate historical voyage expenses
from vessels that will be chartered to the Charterer by September 30, 2004 under
sales-type leases in the pro-forma statement of operations for the six months
ended June 30, 2004. The adjustment to recognize $6,500 per day per vessel under
the vessel management agreement does not include the four vessels and Oscilla
chartered under bareboat charters, see also pro forma adjustment A. Management
fees payable in respect of our vessels are classified as ship operating costs,
and, as such are recorded as a component of operating expenses.
C. This adjustment is to recognize the depreciation charge relating to the 8
vessels accounted for as chartered under operating leases in the pro-forma
statement of operations for the year ended December 31, 2003, to eliminate
historical depreciation from vessels that will be chartered to the Charterer by
September 30, 2004 under sales-type leases in the pro-forma statement of
operations for the six months ended June 30, 2004 and to adjust depreciation to
reflect the acquisition of Oscilla for the year ended December 21, 2003 and the
six months ended June 30, 2004.
D. This adjustment is to recognize administrative expenses of $20,000 per year
for the year ended December 31, 2003 payable by us and each of our subsidiaries
under the administrative services agreement in the pro-forma statement of
operations for the year ended December 31,2003. No adjustment has been made to
the amount of third party expenses which comprise out of pocket expenses
incurred on behalf of the service recipients, including legal fees, independent
auditors, printers, mailing costs, depositories, transfer agents, insurance,
proxy solicitors, filing fees, self-regulatory agencies, listing fees, stock
exchange maintenance fees, directors' fees as set by the relevant service
recipient, and similar fees and expenses. These costs are not covered by the
administrative services agreement and will be borne by the Company. The
administrative expenses are included with our historical expenses for the six
months ended June 30, 2004.
E. We refinanced the senior secured indebtedness of our subsidiaries at the time
that we acquired them from Frontline with the proceeds of a new senior secured
credit facility. This new credit facility has an original principal balance of
$1,058 million and is repayable over six years. This adjustment is to recognize
the change in interest expense that we would have incurred if our refinancing
had taken place as of January 1, 2004 and January 1, 2003. We assume annual
total repayments of $93.7 million based on the repayment profile of the new
credit facility. The pro forma adjustments for the six months ended June 30,
2004 and year ended December 31, 2003 are calculated as follows:
Six months
ended June
30, 2004
-----------
Estimated average balance $1,046.286
Effective Interest rate 2.37%
Estimated interest on new credit facility $12,520
Adjustment to eliminate historical interest expense $(11,908)
Total pro forma adjustment $612
===========
Year ended
December 31,
2003
-----------
Estimated average balance $1,022,634
Effective Interest rate 2.48%
Estimated interest on new credit facility $25,723
Total pro forma adjustment $25,723
===========
Interest on the new credit facility is payable at an interest rate based on
LIBOR plus a margin of 1.25%. We estimated interest payable on the new credit
facility using average LIBOR rates of 1.12% for the six months ended June 30,
2004 and 1.235% for the year ended December 31, 2003. These rates are based on
an average of three month LIBOR over the applicable period. An increase or
decrease in assumed interest rates of 0.125% would increase or decrease
estimated interest expense by $0.7 million and $1.3 million in the six months
ended June 30, 2004 and year ended December 31, 2003 respectively.
In accordance with the terms of our new credit facility we have entered into new
interest rate swap agreements to effectively fix the interest rate payable on
$500 million of our new credit facility for five years. We have not made any
adjustments to this unaudited pro forma financial information to reflect the
estimated effect of these new interest rate swap agreements. We have effectively
fixed the LIBOR element of the interest rate payable at 3.38% and our total
interest rate including margin at 4.63% on $500 million of our new credit
facility. The estimated effect of effectively fixing our interest rate at 4.63%
on $500 million principal amount of debt would be to record additional interest
expense of $1.5 millionfor the six months ended June 30, 2004 and $10.9 million
for the year ended December 31, 2003. Our interim financial statements for the
six months ended June 30, 2004 include $4.2 million interest expense in respect
of these swaps and $1.8 million interest expense in respect of other swaps. We
have not estimated the effect of changes in market values of interest rate swap
contracts in this unaudited pro forma financial information. Our interim
financial statements for the six months ended June 30, 2004 include gains of
$15.1 million in respect of changes in market valuations of interest rate
swaps.
F. This adjustment is to reflect the interest expense on the notes at an
interest rate of 8.5% per year as if they had occurred on January 1, 2004 and
January 1, 2003.
The pro forma adjustments for the six months ended June 30, 2004 and for the
year ended December 31, 2003 are calculated as follows:
Six months ended Year ended
June 30, 2004 December 31, 2003
---------------- -----------------
Estimated interest on the notes ........ 24,924 49,985
Adjustment to eliminate historical
interest expense ....................... (24,376) (2,054)
Total pro forma adjustment ............. $548 $47,931
G. This adjustment represents the estimated adjustment of amortization of
deferred charges and financing fees resulting from our refinancing. The pro
forma adjustments for the six months ended June 30, 2004 and the year ended
December 31, 2003 are calculated as follows:
Six months
ended June
30, 2004
-------------
Amortization of deferred charges and
financing fees associated with the
refinancing of the existing bank debt 1,134
Amortization of deferred charges and
financing fees associated with the notes 1,542
Adjustment to eliminate historical
amortization of deferred charges and
financing fees (2,323)
-------
Total pro forma adjustment $353
=======
Year ended
December 31,
2003
------------
Amortization of deferred charges and
financing fees associated with the
refinancing of the existing bank debt 2,268
Amortization of deferred charges and
financing fees associated with the notes 1,674
Adjustment to eliminate historical
amortization of deferred charges and
financing fees (69)
-------
Total pro forma adjustment $3,873
=======
The pro forma income statements for the six months ended June 30, 2004 and
year ended December 31, 2003 include four vessels recorded as operating under
finance leases that are included in the interim financial statements as
operating under operating leases. The impact on our balance sheet in our interim
financial statements for the six months ended June 30, 2004 of recording these
four vessels as operating under finance leases would be to decrease vessels and
equipment, net by $199.2 million, to increase net investments in finance leases
by $199.2 million.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges for
six month periods ended June 30, 2004 and 2003 and the 12-month periods ending
December 31, 2003, 2002 and 2001. We define the term "earnings" is defined as
the amount resulting from adding and subtracting the following items: add the
following: (a) net income or loss, (b) fixed charges. From the total of added
items subtract the following: (a) share in results of associated companies, (b)
interest capitalized. We define the term "fixed charges" as the sum of the
following: (a) interest expensed, (b) interest capitalized, (c) amortization of
deferred finance charges.
[Enlarge/Download Table]
Six months ended June 30, Year ended December 31,
------------------------- ---------------------------------
2004 2003 2003 2002 2001
Earnings 155,241 232,351 347,831 70,275 256,643
Fixed charges 48,929 18,931 35,117 43,062 59,763
===========================================================
Ratio of earnings to fixed charges 3.17 12.27 9.90 1.63 4.29
===========================================================
PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
Year ended
Six months ended December
June 30, 2004 31, 2003
-----------------------------
Pro forma Earnings 126,944 230,083
Pro forma Fixed charges 49,348 77,144
==========================
Pro forma Ratio of earnings to fixed charges 2.57 2.94
==========================
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following selected financial and other data summarize our historical
financial information. The selected income statement data for the fiscal years
ended December 31, 2003, 2002, and 2001, the selected balance sheet data with
respect to the fiscal years ended December 31, 2003 and 2002 have been derived
from our audited predecessor combined carve-out financial statements included
herein. The selected income statement data for the fiscal year ended December
31, 2000 and the selected balance sheet data with respect to the fiscal year
ended December 31, 2001 and 2000 have been derived from our audited predecessor
combined carve-out financial statements not included herein.
The selected income statement data for the six months ended June 30, 2003
has been derived from our unaudited predecessor combined carve-out financial
statements included herein. The selected balance sheet information for the six
months ended June 30, 2003 has been derived from our unaudited predecessor
combined carve-out financial statements not included herein.
The selected financial information for the six months ended June 30, 2004
has been derived from our unaudited interim financial statements included
herein.
In the opinion of our management, the selected financial information for
the six months ended June 30, 2004 and 2003, includes all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
that information. The selected financial data is not necessarily indicative of
future results. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our unaudited interim financial statements and our audited
predecessor combined carve-out financial statements and the notes thereto and
unaudited interim financial statements and notes thereto included elsewhere in
this prospectus.
This prospectus does not include selected combined financial and other data
for the 12-month period ending December 31, 1999. As noted above, the Company's
selected financial and other data prior to January 1, 2004 is derived from the
combined carve-out financial statements of Frontline and the Company is not in a
position to prepare carve-out financial statements for the 12-month period
ending December 31, 1999 or the selected financial and other data derived from
such financial statements without unreasonable effort and expense.
[Enlarge/Download Table]
Six months ended June 30 Year Ended December 31,
-----------------------------------------------------
2004 2003 2003 2002 2001 2000
-----------------------------------------------------
(dollars in thousands, except ratios and per share data)
Income Statement Data:
Total operating revenues $219,513 $401,589 $695,068 $365,174 $486,655 $482,908
Total operating expenses 80,648 173,972 346,252 279,083 255,937 220,657
Net operating income 138,865 227,617 348,816 86,091 230,718 262,251
Net other income (expenses) (32,553) 1,341 (14,004) (53,925) (43,180) (50,107)
Net income (loss) before
cumulative effect of
change in accounting principle 106,312 228,958 334,812 32,166 187,538 212,144
Cumulative effect of change
in accounting principle -- -- -- (14,142) 24,472 --
Net income 106,312 228,958 334,812 18,024 212,010 212,144
Earnings per share,
basic and diluted (3) $1.44 $3.10 $4.53 $0.24 $2.87 $2.87
Balance Sheet Data (at end of period):
Cash and cash equivalents $32,138 $25,257 $26,519 $20,634 $26,041 $15,274
Newbuildings and vessel purchase
options -- 8,370 8,370 8,370 63,470 36,326
Vessels and equipment, net 518,479 1,918,073 1,863,504 1,904,146 1,696,528 1,572,844
Total assets 2,145,006 2,164,349 2,156,348 2,123,607 1,951,353 1,784,676
Short-term debt and current portion
of long term debt 88,843 135,027 141,522 131,293 130,428 121,399
Long-term debt 1,465,431 949,180 850,088 975,554 870,109 850,453
Share capital 73,925 -- -- -- -- --
Stockholders' equity 564,446 715,615 822,026 485,605 466,742 259,632
Dividends paid and deemed dividends 66,362 -- -- -- -- --
Cash Flow Data
Cash provided by operating activities 109,523 241,912 $415,523 $115,658 $307,167
Cash provided by (used in)
investing activities (7,780) 360 (51,632) (261,779) (271,850)
Cash provided by (used in)
financing activities (69,605) (237,649) (358,006) 140,714 (24,549)
Fleet Data
Number of wholly owned vessels
(end of period) 46 43 43 42 38 35
Number of vessels owned in joint
ventures (end of period) 0 8 6 9 7 2
Average Daily Time Charter Equivalent(1)
VLCCs $56,600 $47,500 $40,400 $22,200 $34,600 $34,500
Suezmaxes $37,100 $40,400 $33,500 $18,400 $30,600 $35,000
Suezmax OBOs $27,000 $38,700 $32,000 $17,700 $28,900 $33,500
----------
(1) Time charter equivalent, or TCE, is a standard industry measure of the
average daily revenue performance of a vessel. This is calculated by
dividing net operating revenues by the number of days on charter. Net
operating revenues are revenues minus voyage expenses. Days spent off hire
are excluded from this calculation. For a reconciliation of net voyage
revenues to voyage revenues, see note 2 to "Summary Combined Financial and
Other Data".
(2) On May 28, 2004, the Company declared a dividend of $0.25 per share which
was paid on July 9, 2004.
(3) For all periods presented per share amounts are based on a denominator of
73,925,837 common shares outstanding which is the number of issued shares
outstanding on June 16, 2004, the date that the Company's shares were
partially spun off. The Company's shares were listed on the New York Stock
Exchange on June 17, 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our interim financial statements
as at and for the six months ended June 30, 2004 and our predecessor combined
carve-out financial statements as at and for the three year period ended
December 31, 2003 and for the six months ended June 30, 2003, which we call our
combined financial statements, and the related notes, and the other financial
information included elsewhere in this document. This discussion includes
forward-looking statements based on assumptions about our future business. Our
actual results could differ materially from those contained in the
forward-looking statements.
Overview - Predecessor
For the years ended December 31, 2003, 2002 and 2001, and the six months
ended June 30, 2003, the combined financial statements presented herein have
been carved out of the consolidated financial statements of Frontline. Our
financial position, results of operations and cash flows reflected in our
combined financial statements are not necessarily indicative of those that would
have been achieved had we operated autonomously for all periods presented.
Our combined financial statements assume that our business was operated as
a separate corporate entity prior to its inception. Ship Finance International
Limited, or the Company, was formed on October 10, 2003, and prior to that time
our business was operated as part of the shipping business of Frontline. Our
combined financial statements have been prepared to reflect the combination of
certain of Frontline's wholly owned VLCC and Suezmax owning subsidiaries,
interests in joint ventures and an option to acquire an additional VLCC, which
taken together represent the 46 vessel owning subsidiaries and one subsidiary
holding an option to acquire a VLCC that we have acquired from Frontline and
which we refer to collectively as the Vessel Interests.
Where Frontline's assets, liabilities, revenues and expenses relate to the
specific Vessel Interests, these have been identified and carved out for
inclusion in our combined financial statements. Frontline's shipping interests
and other assets, liabilities, revenues and expenses that do not relate to the
Vessel Interests have been identified and not included in our combined financial
statements. The preparation of our combined financial statements requires
allocation of certain assets and liabilities and expenses where these items are
not identifiable as related to one specific activity. Administrative overheads
of Frontline that cannot be related to a specific vessel have been allocated pro
rata based on the number of vessels in the Company compared with the number in
Frontline's total fleet. Management has deemed that the related allocations are
reasonable to present the financial position, results of operations, and cash
flows of the Company. Management believes the various allocated amounts would
not materially differ from those that would have been achieved had the Company
operated on a stand-alone basis for all periods presented. However, the
financial position, results of operations and cash flows of the Company are not
necessarily indicative of those that would have been achieved had the Company
operated autonomously for all periods presented as the Company may have made
different operational and investment decisions as a Company independent of
Frontline.
The majority of the Company's assets, liabilities, revenues and expenses
are vessel specific and are included in the vessel owning subsidiaries'
financial statements. However, in addition, the following significant
allocations have been made:
Goodwill: Goodwill has arisen on certain of the acquisitions undertaken in the
three year period ended December 31, 2003 as described in Note 21 to our
combined financial statements. Goodwill has been allocated to the Company on the
basis that the vessels obtained in these acquisitions, and to which the goodwill
is considered to relate, are included in our combined financial statements. The
associated amortization of goodwill has also been allocated to the Company and
recognized in our combined financial statements. Following the adoption of FAS
142 effective January 1, 2002, we no longer amortize goodwill, but rather test
it for impairment at least on an annual basis.
Long term debt: An allocation of corporate debt of Frontline has been made. This
debt has been allocated as it relates specifically to a vessel over which the
Company has a purchase option. The associated interest expense has also been
allocated to our combined financial statements.
Interest rate swaps: For the purposes of our combined financial statements,
interest rate swaps specific to carved out debt have been included. In addition,
non-debt specific interest rate swaps have been included on the basis that such
swaps were intended to cover the floating rate debt that has been included in
our combined statements. The associated mark to market adjustments arising on
the swaps has also been allocated to our combined financial statements and is
included in other financial items, net.
Administrative expenses: Frontline's overheads relate primarily to
management organizations in Bermuda and Oslo that manage the business. These
overhead costs include salaries and other employee related costs, office rents,
legal and professional fees and other general administrative expenses. Other
employee related costs includes costs recognized in relation to Frontline's
employee share option plan.
No allocation of interest income has been made and interest income reported
in our combined financial statements represents interest income earned by the
vessel owning subsidiaries and interest earned on loans to joint ventures.
Our combined financial statements have been prepared based on the
completion of the transaction between the Company and Frontline described in
this prospectus.
The Company and Frontline entered into a fleet purchase agreement pursuant
to which we purchased the Vessel Interests for $950 million, excluding working
capital and other intercompany balances to be retained by Frontline, plus
assumption of senior secured indebtedness with respect to the fleet in the
amount of $1.158 billion. The purchase price for the Vessel Interests and the
refinancing of the existing senior secured indebtedness was financed through a
combination of the net proceeds of the Notes, funds from our $1.058 billion
senior secured credit facility and a deemed equity contribution from Frontline.
All of our vessels are chartered to the Charterer under long term time
charters. All of our vessel technical management is performed for us by
Frontline Management under the management agreements for a fixed rate. As such,
our future operations and the operations of our subsidiaries will differ
significantly from the historical operations of Frontline and its subsidiaries
upon which our historical carved out financial statements are based. In
particular, our revenues are generated primarily from charter payments made to
us by the Charterer under the charters that consist of sales type leases and
operating leases. Our expenses consist primarily of interest on the notes and
our senior secured credit facility and payments that we make to Frontline
Management.
Overview - Successor
Ship Finance International Limited was incorporated in Bermuda on October
10, 2003 for the purpose of acquiring certain of the shipping assets of its
parent company, Frontline Ltd. Frontline is a publicly listed Bermuda based
shipping company engaged primarily in the ownership and operation of oil
tankers, including oil/bulk/ore, OBO, carriers. The Company is a wholly owned
subsidiary of Frontline. Frontline operates tankers of two sizes: very large
crude carriers, which are between 200,000 and 320,000 dwt, and Suezmaxes, which
are vessels between 120,000 and 170,000 dwt. Frontline is a holding company
which operates through subsidiaries and joint ventures located in Bermuda, Isle
of Man, Liberia, Norway, Panama, Singapore, the Bahamas and Sweden
On December 11, 2003 the Company entered into a purchase agreement with
Frontline to purchase certain of Frontline's wholly owned VLCC and Suezmax
owning subsidiaries, including certain subsidiaries acquired or expected to be
acquired through a reorganization of interests in certain joint ventures plus a
purchase option to acquire a further VLCC, which we refer to collectively as the
Vessel Interests.
On December 18, 2003 the Company issued $580 million of 8.5% Senior Notes
due 2013 in a private offering to Qualified Institutional Buyers. The proceeds
from this offering, together with a deemed equity contribution of approximately
$525 million from Frontline, were used to complete the acquisition of the Vessel
Interests.
On January 1, 2004 the Company completed the purchase of the Vessel
Interests it agreed to purchase from Frontline on December 11, 2003.
As a result of these transactions the Company has acquired a fleet of 24
Suezmax tankers, 22 VLCCs, and an option to acquire an additional VLCC with a
combined deadweight tonnage of 10,498,000,000 tones and a combined book value of
approximately $2,107 million.
On January 1, 2004 the Company entered into time charter agreements with
Frontline Shipping Ltd., a subsidiary of Frontline, to charter the 46 vessels
for substantially the remainder of their useful lives at fixed rates.
On January 1, 2004 the Company entered into management agreements with
Frontline Management (Bermuda) Ltd. a subsidiary of Frontline, to manage the 46
vessels for substantially the remainder of their useful lives at fixed rates.
Predecessor Business
Our combined financial statements reflect the business activities of
Frontline related to the Vessel Interests. Frontline's principal focus and
expertise is to provide transportation services to major integrated oil
companies and other customers that require transportation of crude oil and oil
products cargoes.
As at December 31, 2003, the Vessel Interests were comprised of 19 wholly
owned VLCCs, 24 wholly owned Suezmax tankers, one option to acquire a VLCC and
interests in six associated companies which each own a VLCC. In 2002, we took
delivery of four wholly owned newbuilding double hull VLCCs. In 2001, we took
delivery of three VLCCs built in 1999 on which we had purchase options. In
addition, through Frontline's acquisition of Mosvold Shipping Limited, which was
completed in 2001, we acquired one VLCC newbuilding contract, which was
delivered in October 2002. In 2000, through Frontline's acquisition of Golden
Ocean Group Limited, we acquired three VLCCs, interests in two associated
companies which each owned a VLCC and four options to acquire a VLCC.
Successor Business
The completion of the purchase of the 46 crude oil tanker owning
subsidiaries and one subsidiary holding an option on an additional tanker from
Frontline took place as of January 1, 2004. We have chartered our fleet to the
Charterer, a wholly owned subsidiary of Frontline, under long term, fixed rate
charters effective as of January 1, 2004. The Charterer was initially
capitalized by Frontline with $250 million to support its obligation to make
charter payments to us. We also entered into fixed rate management agreements
with another wholly owned subsidiary of Frontline. These arrangements are
intended to provide us with stable cash flow and reduce our exposure to
volatility in the markets for these vessels.
Factors Affecting Our Historical Results
The principal factors that have affected our historical results of
operations and financial position include:
o the earnings of our vessels in the charter market;
o vessel expenses;
o administrative expenses;
o depreciation;
o interest expense; and
o foreign exchange.
We have derived our earnings from bareboat charters, time charters, voyage
charters and contracts of affreightment.
A bareboat charter is a contract for the use of a vessel for a specified
period of time where the charterer pays substantially all of the vessel voyage
costs and operating costs. A time charter is a contract for the use of a vessel
for a specific period of time during which the charterer pays substantially all
of the vessel voyage costs but the vessel owner pays the operating costs. A
voyage charter is a contract for the use of a vessel for a specific voyage in
which the vessel owner pays substantially all of the vessel voyage costs and
operating costs. A contract of affreightment is a form of voyage charter in
which the owner agrees to carry a specific type and quantity of cargo in two or
more shipments over an agreed period of time. Accordingly, for equivalent
profitability, charter income under a voyage charter would be greater than that
under a time charter to take account of the owner's payment of the vessel voyage
costs. In order to compare vessels trading under different types of charters, it
is standard industry practice to measure the revenue performance of a vessel in
terms of average daily time charter equivalent earnings, or TCEs. For voyage
charters, this is calculated by dividing net operating revenues by the number of
days on charter. Days spent offhire are excluded from this calculation.
As at December 31, 2003, 2002 and 2001, 29, 35 and 24, respectively, of our
vessels operated in the voyage charter market. The tanker industry has
historically been highly cyclical, experiencing volatility in profitability,
vessel values and freight rates. In particular, freight and charter rates are
strongly influenced by the supply of tanker vessels and the demand for oil
transportation services. The following table sets forth the average daily TCEs
earned by our tanker fleet over the last three years:
2003 2002 2001
------ ------ ------
(dollars per day)
VLCC .................... 40,400 22,200 34,600
Suezmax ................. 33,500 18,400 30,600
Suezmax OBO ............. 32,000 17,700 28,900
Operating costs are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.
Administrative expenses are composed of general corporate overhead
expenses, including personnel costs, property costs, legal and professional fees
and other general administrative expenses. Personnel costs include, among other
things, salaries, pension costs, fringe benefits, travel costs and health
insurance. In 2002 and 2001, administrative expenses also included
administrative costs associated with the Frontline's participation in Tankers
International LLC, or Tankers, a pooling arrangement for the commercial
operation of the VLCCs of Frontline and five other VLCC operators, entered into
in December of 1999. Frontline withdrew from the pool in July of 2002 and these
costs ceased in the second half of 2002.
Depreciation, or the periodic cost charged to our income for the reduction
in usefulness and long-term value of our vessels, is also related to the number
of vessels we own. We depreciate the cost of our vessels, less their estimated
residual value, over their estimated useful life on a straight-line basis. No
charge is made for depreciation of vessels under construction until they are
delivered.
Interest expense in our combined financial statements relates to vessel
specific debt facilities of our subsidiaries and to corporate debt that has been
allocated to us. Interest expense depends on our overall borrowing levels and
may significantly increase when we acquire vessels or on the delivery of
newbuildings. Interest incurred during the construction of a newbuilding is
capitalized in the cost of the newbuilding. Interest expense may also change
with prevailing interest rates, although the effect of these changes may be
reduced by interest rate swaps or other derivative instruments. As at December
31, 2003, all of our debt was floating rate debt. We may enter into interest
rate swap arrangements if we believe it is advantageous to do so. As at December
31, 2003, certain of our subsidiaries had Yen denominated debt and charters
denominated in Yen, which expose us to exchange rate risk. As at December 31,
2003 and 2002, we had Yen denominated debt in subsidiaries of (Y)9.6 billion and
(Y)5.1 billion respectively.
Although inflation has had a moderate impact on our vessel operating
expenses and corporate overheads, management does not consider inflation to be a
significant risk to direct costs in the current and foreseeable economic
environment. In addition, in a shipping downturn, costs subject to inflation can
usually be controlled because shipping companies typically monitor costs to
preserve liquidity and encourage suppliers and service providers to lower rates
and prices in the event of a downturn.
Factors Affecting Our Future Results
Principal factors that are expected to affect our future results of
operations and financial position include:
o the earnings of our vessels under time charters to the Charterer;
o the amount we receive under the profit sharing arrangement with
the Charterer;
o the earnings and expenses related to any additional vessels that
we acquire;
o vessel management fees;
o administrative expenses; and
o interest expense.
Initially, our future revenues will derive primarily from our long term,
fixed rate time charters with the Charterer. All 46 vessels that we have
acquired from Frontline are chartered to the Charterer under long term charters,
described under "Business--Charter Arrangements." In addition, beginning with
the final 11-month period in 2004 and for each calendar year thereafter, the
Charterer will pay us a profit sharing payment if our vessels' earnings exceed
certain amounts.
The Company's future expenses will consist primarily of vessel management
fees, administrative expenses and interest expense. With respect to vessel
management fees, our vessel owning subsidiaries have entered into fixed cost
management agreements with Frontline Management under which Frontline Management
will be responsible for all technical management of the vessels, including
crewing, maintenance, repair, capital expenditures, drydocking, vessel taxes and
other vessel operating and voyage expenses. Each of these subsidiaries pay
Frontline Management a fixed fee of $6,500 per day per vessel for all of the
above services.
The Company has entered into an administrative services agreement with
Frontline Management under which Frontline Management provides us with
administrative support services such as the maintenance of our corporate books
and records, the preparation of tax returns and financial statements, assistance
with corporate and regulatory compliance matters not related to our vessels,
payroll services, legal services, and other non-vessel related administrative
services. The Company and our vessel owning subsidiaries pay Frontline
Management a fixed fee of $20,000 each per year for its services under the
agreement, and reimburse Frontline Management for reasonable third party costs,
if any, advanced on our behalf by Frontline, including directors fees and
expenses, shareholder communications and public relations, registrars, audit,
legal fees and listings costs. The Company currently does not have its own
employees.
Other than the interest expense associated with our notes, the amount of
our interest expense will be dependent on the same factors set forth above as to
Frontline's historic incurrence of interest expense. The Company has a $1.058
billion secured six-year credit facility with a syndicate of financial
institutions. This credit facility provided us with a portion of the capital
required to complete the acquisition of the Vessel Interests and to refinance
related secured indebtedness. We have entered into interest rate swaps to fix
the interest on $500.0 million of the borrowings under this facility for a
period of five years at an average rate of 3.4%.
Change in Accounting Policies
In 2001, the Company changed its accounting policy for drydockings to the
"expense as incurred" method, whereby drydocking expenses are recognized when
they take place. Prior to 2001, provisions for future drydockings were accrued
and charged as an expense on a pro-rata basis over the period to the next
scheduled vessel drydocking. The "expense as incurred" method is considered by
management to be more reliable as it eliminates the uncertainty associated with
estimating the cost and timing of future drydockings. The cumulative effect of
this change in accounting principle is shown separately in the combined
statements of operations for the year ended December 31, 2001 and resulted in a
credit to income of $24.5 million in 2001. The cumulative effect of this change
as of January 1, 2001 on our combined balance sheet was to reduce total
liabilities by $24.5 million.
In June 2001, the FASB approved Statement of Financial Accounting Standard,
or SFAS, No. 142, "Goodwill and Other Intangible Assets." As of January 1, 2002,
the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and
recorded an impairment charge of $14.1 million for the unamortized goodwill on
that date that is shown separately in the combined statement of operations as a
cumulative effect of change in accounting principle. The valuation of the fair
value of the reporting unit used to assess the recoverability of goodwill, was a
combination of independent third party valuations and the quoted market price of
Frontline's shares.
As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivatives and Hedging Activities." Certain hedge relationships met the hedge
criteria prior to SFAS 133, but do not meet the criteria for hedge accounting
under SFAS 133. The Company adopted SFAS 133 in the first quarter of fiscal year
2001 and upon initial adoption recorded certain transition adjustments resulting
in recognizing the fair value of its derivatives as assets of $0.4 million and
liabilities of $0.7 million. We recognized a gain of $0.2 million in income and
a charge of $0.5 million made to other comprehensive income. On January 1, 2002,
the Company discontinued hedge accounting for two interest rate swaps previously
accounted for as cash flow hedges. This resulted in a balance of $4.9 million
being frozen in accumulated other comprehensive income as at that date and this
will be reclassified to the income statement over the life of the underlying
instrument.
Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In December 2003, the FASB issued Interpretation 46
Revised, Consolidation of Variable Interest Entities. In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be combined by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply in the first fiscal year or interim period ending after
December 15, 2003 to variable interest entities created after January 31, 2003.
The consolidation requirements apply in the first fiscal year or interim period
ending after December 15, 2003 for "Special Purpose Entities" created before
January 31, 2003. The consolidation requirements apply in the first fiscal year
or interim period ending after March 15, 2004 for other entities created before
January 31, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. In accordance with the requirements of
Interpretation 46(R), the company has initially applied its provisions to
entities that are not considered to be special purpose entities that were
created before January 31, 2003 as of March 31, 2004. This application has not
had an impact on the results of operations or financial position of the Company
as no additional entities were required to be consolidated.
The Company has an option to purchase the VLCC Oscilla on or before the
expiry of a five-year bareboat charter, which commenced in March 2000. Oscilla
is owned and operated by an unrelated special purpose entity, Seacrest Shipping
Ltd. ("Seacrest"). Prior to the adoption of FIN 46R this special purpose entity
was not consolidated by the predecessor combined carve out entity. We have
determined that the entity that owns Oscilla is a variable interest entity and
that the Company is the primary beneficiary. At the current date, after
exhaustive efforts, we have been unable to obtain the accounting information
necessary to be able to consolidate the entity that owns Oscilla. If the Company
had exercised its option at December 31, 2003, the cost to the Company of the
Oscilla would have been approximately $42.3 million and the maximum exposure to
loss is $17.4 million, representing amounts outstanding from Seacrest of
$9.0 million and the carrying value of the option of $8.4 million. At December
31, 2003, Seacrest had total indebtedness of $36.0 million (including $9.0
million due to the Company) and JPY674.6 million (equivalent to $6.3 million)
and the fair value of the vessel Oscilla was $78.5 million.
Critical Accounting Policies
The preparation of our combined financial statements in accordance with
U.S. GAAP requires management to make estimates and assumptions affecting the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of our combined financial statements and the
reported amounts of revenues and expenses during the reporting period. The
following is a discussion of the accounting policies applied by the Company that
are considered to involve a higher degree of judgment in their application. See
Note 2 to our combined financial statements for details of all of the Company's
material accounting policies.
Carve out of the Financial Statements of Frontline
For the years ended December 31, 2003, 2002 and 2001, our combined
financial statements presented herein have been carved out of the financial
statements of Frontline.
Frontline is a shipping company with activities that include the ownership
and operations of oil tankers and dry bulk carriers as well as leasing in
vessels and participation in tanker owning joint venture arrangements. Frontline
is also involved in the purchase and sale of vessels. Where Frontline's assets,
liabilities, revenues and expenses relate to the specific Vessel Interests,
these have been identified and carved out for inclusion in our combined
financial statements. Frontline's shipping interests and other assets,
liabilities, revenues and expenses that do not relate to the Vessel Interests
have been identified and not included in our combined financial statements. The
preparation of our combined financial statements requires the allocation of
certain assets and liabilities and expenses where these items are not
identifiable as related to one specific activity. Administrative overheads of
Frontline that cannot be related to a specific vessel have been allocated based
on the number of vessels in the Company compared with the number in Frontline's
total fleet. Management has deemed the related allocations are reasonable to
present the financial position, results of operations, and cash flows of the
Company. Management believes the various allocated amounts would not materially
differ from those that would have been achieved had the Company operated on a
stand-alone basis for all periods presented. The financial position, results of
operations and cash flows of the Company are not necessarily indicative of those
that would have been achieved had the Company operated autonomously for all
years presented as the Company may have made different operational and
investment decisions as a company independent of Frontline.
Revenue Recognition
Revenues are generated from freight billings, contracts of affreightment,
time charter and bareboat charter hires. Time charter and bareboat charter
revenues are recorded over the term of the charter as service is provided. Under
a voyage charter the revenues and associated voyage costs are recognized ratably
over the estimated duration of the voyage. The operating results of voyages in
progress at a reporting date are estimated and recognized pro-rata on a per day
basis. Probable losses on voyages are provided for in full at the time such
losses can be estimated.
Amounts receivable or payable arising from profit sharing arrangements are
accrued based on the estimated results of the voyage recorded as at the
reporting date.
The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net operating
revenues, calculated on a TCE basis, are allocated to the pool participants
according to an agreed formula. The same revenue and expenses principles stated
above are applied in determining the pool's net operating revenues.
Vessels and Depreciation
The cost of the Company's vessels is depreciated on a straight-line basis
over the vessels' remaining economic useful lives. Management estimates the
useful life of the Company's vessels to be 25 years. This is a common life
expectancy applied in the shipping industry. Effective in April 2001, the
International Maritime Organization, or IMO, implemented new regulations that
result in the accelerated phase out of certain non-double hull vessels.
In December 2003, the Marine Environmental Protection Committee of the IMO
adopted a proposed amendment to the International Convention for the Prevention
of Pollution from Ships to accelerate the phase out of single hull tankers from
2015 to 2010 unless the relevant flag states extend the date to 2015. This
proposed amendment will take effect in April 2005 unless objected to by a
sufficient number of states. As a result, the Company has re-evaluated the
estimated useful lives of its single hull vessels and determined this to be the
earlier of 25 years or the vessel's anniversary date in 2015, resulting in the
reduction of the estimated useful lives of thirteen of the Company's vessels in
the fourth quarter of 2003. This reduction has resulted in an annualized
increase in depreciation expense of $4.4 million effective from October 1, 2003.
If the estimated economic useful life is incorrect, or circumstances change
and the estimated economic useful life has to be revised, an impairment loss
could result in future periods. The Company will continue to monitor the
situation and revise the estimated useful lives of its non-double hull vessels
as appropriate when new regulations are implemented.
Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In
assessing the recoverability of the vessels' carrying amounts, the Company must
make assumptions regarding estimated future cash flows. These assumptions
include assumptions about the spot market rates for vessels, the revenues the
vessel could earn under time charter, voyage charter or bareboat charter, the
operating costs of our vessels and the estimated economic useful life of our
vessels. In making these assumptions, the Company refers to historical trends
and performance as well as any known future factors. Factors we consider
important that could effect recoverability and trigger impairment include
significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
significant negative industry or economic trends. If our review indicates
impairment, an impairment charge is recognized based on the difference between
carrying value and fair value. Fair value is typically established using an
average of three independent valuations.
Leases
Leases are classified as either capital leases or operating leases based on
an assessment of the terms of the lease. Classification of leases involves the
use of estimates or assumptions about fair values of leased vessels, expected
future values of vessels and, if lessor's rates of return are not known,
lessee's cost of capital. We generally base our estimates of fair value on the
average of 3 independent broker valuations of a vessel. Our estimates of
expected future values of vessels are based on current fair values amortised in
accordance with our standard depreciation policy for owned vessels. Lessee's
cost of capital is estimated using an average which includes estimated return on
equity and estimated incremental borrowing cost. The classification of leases in
our accounts as either capital leases or operating leases is sensitive to
changes in these underlying estimates and assumptions.
Variable Interest Entities
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. A variable interest entity is a legal entity that
lacks either (a) equity interest holders as a group that lack the
characteristics of a controlling financial interest, including: decision making
ability and an interest in the entity's residual risks and rewards or (b) the
equity holders have not provided sufficient equity investment to permit the
entity to finance its activities without additional subordinated financial
support. Interpretation 46 requires a variable interest entity to be
consolidated if any of its interest holders are entitled to a majority of the
entity's residual return or are exposed to a majority of its expected losses.
In December 2003, the FASB issued FASB Interpretation 46(R), Consolidation
of Variable Interest Entities. FIN 46(R) replaces FIN 46 and clarifies the
accounting for interests in variable interest entities.
In applying the provisions of Interpretation 46(R), the Company must make
assumptions in respect of, but not limited to, the sufficiency of the equity
investment in the underlying entity. These assumptions include assumptions about
the future revenues, operating costs and estimated economic useful lives of
assets of the underlying entity.
The Company initially applied the provisions of Interpretation 46(R) to all
special purpose entities and other entities created after January 31, 2003 on
December 31, 2003. This application has not had a material impact on the results
of operations or financial position of the Company. In accordance with the
requirements of Interpretation 46(R), the Company will initially applied its
provisions to entities that are not considered to be special purpose entities
that were created before January 31, 2003 as of March 31, 2004. This application
has not had a material impact on the results of operations or financial position
of the Company.
Results of Operations
Six Months ended June 30, 2004 compared with the six months ended June 30, 2003
Total operating revenues decreased by 45% to $219.5 million in the six
months ended June 30, 2004 compared with $401.6 million in the six months ended
June 30, 2003. Operating revenues include finance lease interest income, finance
lease service revenues, profit sharing revenues from our profit sharing
arrangement with Frontline and charter revenues for the period prior to our
vessels commencing trading under their charters to Frontline. They also include
charter revenues for vessels trading under long term charters to third parties
during the period.
In the period since we acquired our fleet of vessels from Frontline,
sixteen of our twenty four Suezmax tankers and eighteen of our twenty two VLCC
tankers have commenced employment with Frontline under long-term charters which
are accounted for as finance leases. Receipts from finance leases are allocated
as finance lease interest income, finance lease service revenues and capital
repayments in order to realize a constant periodic rate of return on the
unamortized finance lease investment.
In the six months ended June 30, 2004 and six months ended June 30, 2003
finance lease interest income was $64.1 million and $nil respectively, finance
lease service revenues were $33.5 million and $nil respectively and profit
sharing revenues recognized were $5.7 million and $nil respectively. We recorded
capital repayments on finance leases amounting to $26.7 million in the six
months ended June 30, 2004 ($nil - 2003).
In accordance with US GAAP we recognize profit sharing revenues only when
those revenues are earned and realizable. In accordance with US GAAP we
recognize profit sharing revenues only when those revenues are earned and
realizable. We consider profit sharing revenues to be earned and realizable to
the extent that a vessel's underlying earnings on a time charter equivalent
basis exceed the profit sharing threshold for the profit sharing period. This
threshold is calculated as the number of days in the profit sharing period
multiplied by the daily profit sharing threshold rates, which are $21,100 per
day for Suezmaxes and $25,575 per day for VLCCs, on a time charter equivalent
basis. Our profit sharing revenues are 20% of a vessel's underlying earnings in
excess of the threshold. The total profit sharing revenues earned and realizable
for the six months ended June 30, 2004 are $5.7 million. This amount has been
recognized in our interim financial statements. Should our vessels' earnings
continue to equal or exceed the daily profit sharing threshold rates for the
remainder of 2004 a further $34.4 million of profit sharing revenues will be
recognized by us in respect of our vessels' underlying earnings in the six
months ended June 30, 2004.
Net voyage revenues earned by our fleet in the period prior to commencing
trading under their charters to Frontline were $40.8 million for the six months
ended June 30, 2004 and $296.3 million for the six months ended June 30, 2003
respectively. As all of our vessels are now employed under long-term charter to
Frontline or to third parties so we do not expect to report further net voyage
revenues.
Charter revenues from vessels under long-term charters (comprising time
charters and bareboat charters) to third parties were $66.6 million in the six
months ended June 30, 2004 compared with $24.5 million in the six months ended
June 30, 2003. At June 30, 2004 we had eight Suezmaxes and four VLCCs on
long-term charters to third parties. These vessels will be redelivered to us
between August 2004 and February 2007. Upon redelivery these vessels will
immediately go on long-term charter to Frontline.
Under the terms of our charter agreements with Frontline we pay or receive
any difference between our earnings from our vessels which are not currently on
charter to Frontline and the rates Frontline has agreed to pay us. Payments made
under this arrangement are accounted for as deemed dividends and amount to
$47.9million in the six months ended June 30, 2004 compared with $nil in the six
months ended June 30, 2003.
Ship operating expenses, which since January 1, 2004 primarily consist of
the management fee payable to Frontline, were $48.4 million in the six months
ended June 30, 2004 compared with $38.6 million in the six months ended June 30,
2003. The change is primarily due to changes in our fleet and to the fact that
ship operating expenses in our predecessor combined carve-out financial
statements consist of actual operating costs of our fleet whereas from January
1, 2004 ship operating expenses comprise a management fee of $6,500 per day for
all of our vessels. In the six months ended June 30, 2004 we operated 4 more
wholly owned VLCCs than in the six months ended June 30, 2003. This was due to
transactions whereby we acquired 100% interests in the VLCCs New Circassia on
June 30, 2003 and Edinburgh, Ariake and Hakata during February of 2004. Actual
ship operating costs per day on average in the six months ended June 30, 2003
were $5,200 for our Suezmax OBOs, $5,400 for our Suezmaxes and $6,100 for our
VLCCs.
Administrative expenses were $1.5 million in the six months ended June 30,
2004 and $3.0 million in the six months ended June 30, 2003 and primarily
consist of legal, professional and audit fees. Administrative expenses reported
in our predecessor combined carve-out financial statements consist of an
allocation of total administrative expenses reported by Frontline, whereas
administrative expenses reported since January 1 consist of actual costs. Actual
administrative expenses in the six months ended June 30, 2004 include an
management fee of $0.5 million paid to Frontline Management for provision of
administrative support services and $1.0 million of other expenses, mainly
legal, professional and audit costs, which are not covered by our administrative
sevices agreement with Frontline Management.
Depreciation was $21.8 million in the six months ended June 30, 2004 and
$51.4 million in the six months ended June 30, 2003. Depreciation expenses
relate to the vessels on charters to third parties that are accounted for as
operating leases. The reduction is due to the fact that most of our fleet is now
employed under long-term charters to Frontline which are accounted for as
sales-type leases. In the six months ended June 30, 2003 we recorded
depreciation on our entire wholly-owned fleet of 42 vessels whereas in the six
months ended June 30, 2004 we recorded depreciation on only 12 vessels
throughout the period. Additionally we recorded depreciation on vessels during
the period before they commenced employment with Frontline under long-term
charter.
Interest income was $2.3 million, for the six months ended June 30, 2004
and $4.6 million for the six months ended June 30, 2003 and interest expense was
$48.9 million for the six months ended June 30, 2004 and $18.9 million for the
six months ended June 30, 2003. Interest expense includes interest on bank
financing and on the $580.0 million 8.5% Senior Notes issued in December 2003
together with swap interest and amortization of deferred finance fees. The
increase in interest expense is primarily due to our issuance of Senior Notes
together with a write off of $4.3 million of unamortized fees on refinanced bank
debt in the six months ended June 30, 2004. At June 30, 2003 we had total
outstanding debt of $1,084.2 million compared with $1,554.3 million at June 30,
2004. Interest expense includes swap interest of $6.0 million and $2.6 million
and amortization of deferred finance fees of $6.6 million and $0.5 million in
the six months ended June 30, 2004 and June 30, 2003 respectively.
Other financial items for the six months ended June 30, 2004 were a credit
of $14.0 million compared with a loss of $0.2 million in the six months ended
June 30, 2003. Other financial items consists primarily of mark to market
valuation changes on our interest rate swap contracts. At June 30, 2004 the
Company had interest rate swaps with a total notional principal amount of $500.0
million outstanding and has recorded a $12.6 million credit attributable to the
mark to market valuation of these interest rate swaps in the six months ended
June 30, 2004 compared with a credit of $1.3 million for the six months ended
June 30, 2003.
Year ended December 31, 2003 compared with the year ended December 31, 2002
Total operating revenues increased by 90% to $695.1 million in 2003 from
$365.2 million in 2002. Time charter equivalent revenues increased by 102% to
$546.5 million in 2003 compared with $271.2 million in 2002. In 2002, the
Company took delivery of four wholly owned double hull VLCCs, which are included
for the entire 2003 period. However, this increase primarily reflects the strong
earnings in the tanker market in the 2003 period. The average daily TCEs earned
by the Company's VLCCs, Suezmax tankers, and Suezmax OBO carriers in 2003 were
$40,400, $33,500 and $32,000, respectively, compared with $22,200, $18,400 and
$17,700, respectively, in 2002. This increase in average daily TCEs is in line
with the overall increase in operating revenues that we have experienced during
2003.
Spot voyage charters represented 88% and 85% of the Company's time charter
equivalent revenues in 2003 and 2002 respectively. Accordingly, the Company's
revenues are significantly affected by the prevailing spot rates in the markets
in which the vessels operate. Traditionally, spot market rates are highly
volatile and are determined by market forces such as worldwide demand, changes
in the production of crude oil, changes in seaborne and other transportation
patterns including changes in the distances that cargoes are transported,
environmental concerns and regulations and competition from alternative sources
of energy. Fiscal year 2003 started with extremely strong charter rates which
were mainly driven by factors such as the strike in Venezuela which resulted in
longer haul imports, a cold winter in the northern hemisphere resulting in
increased demand for heating oil and increased consumption in the Far East
especially China, all of which have resulted in spot market rates being
significantly stronger than in 2002. Oil demand for 2003 experienced its
strongest growth in 15 years with an increase of approximately 3.5% for the 2003
calendar year.
Voyage expenses and commission increased by 58% from $94.0 million in 2002
to $148.5 million in 2003. This increase is primarily as a result of the
withdrawal of Frontline from participation in the Tankers International LLC pool
in July 2002. Under the pool arrangement, voyage costs and commission for
vessels entered in the pool were borne by the pool. After Frontline's withdrawal
from the pool these costs were borne by Frontline. The increase also reflects
increased commissions due to increased operating revenues.
Vessel operating expenses, which include drydocking costs, have remained
steady, increasing marginally by 0.8% to $82.0 million in 2003 from $81.4
million in 2002. The average daily operating costs, including drydockings, of
the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $6,318,
$5,578 and $5,466 respectively, compared with $7,211, $5,972 and $5,711
respectively, in 2002. VLCC rates have reduced primarily as a result of a
decrease in the number of VLCCs drydocked in the year from four in 2002 to two
in 2003.
Depreciation and amortization increased 10% to $106.0 million in 2003 to
$96.8 million in 2002. The increase primarily relates to a full year's
depreciation being included in 2003 for the four vessels delivered in 2002.
Effective October 1, 2003, the Company re-evaluated the estimated useful life of
its single hull vessels and determined this to be either 25 years or the
vessel's anniversary date in 2015 whichever came first. As a result, the
estimated useful life of thirteen of the Company's vessels was reduced resulting
in an increase in depreciation expense of $1.1 million in the fourth quarter of
2003 ($4.4 million on an annualized basis).
Administrative expenses increased 40% to $9.7 million in 2003 from $6.9
million in 2002 primarily as a result an increase in costs recognized in
relation to Frontline's employee share option plan along with increased legal
costs incurred by the Company.
Net interest expense for 2003 was $29.3 million, a decrease of 13% compared
with $33.6 million in 2002. Interest income decreased 31.1% to $5.9 million in
2003 from $8.5 million in 2002 mainly due to a decrease in interest income from
loans to associated companies. This is as a result of reductions in our average
total interest bearing loans to associated companies in 2003. Interest expense
decreased to $35.1 million in 2003 from $42.1 million in 2002. At December 31,
2003, the Company had $991.6 million of floating rate debt and the decrease in
the interest expense reflects the benefit of lower interest rates in the 2003
period along with reduced debt in the year.
The share in result of associated companies increased from a loss $10.1
million in 2002 to earnings of $22.1 million in 2003. The increase is due to a
combination of the strength of tanker earnings in 2003 compared with 2002 and
foreign currency exchange losses recognized in associated companies with Yen
denominated long term debt in 2002. In the year ended December 31, 2003, the
Company recorded an impairment charge of $5.2 million related to the
other-than-temporary decline in value of its investments in Golden Lagoon
Corporation and Ichiban Transport Corporation. This impairment charge was
triggered by signing agreements on June 25, 2003 for the sale of our investments
for proceeds which were less than book value of those investments.
The Company incurred a foreign currency exchange loss of $10.4 million in
2003 compared with a loss of $5.6 million in 2002. Foreign exchange gains and
losses arise primarily on the Yen debt in certain subsidiaries. In the 2003, the
Yen strengthened against the U.S. dollar from (Y)118.54 at December 31, 2002 to
(Y)107.1 at December 31, 2003. At December 31, 2003, the Company had Yen debt of
(Y)9.6 billion, compared with (Y)5.1 billion at December 31, 2002.
Other financial items have increased from a charge of $4.5 million in 2002
to income of $3.6 million in 2003. In both years, other financial items
consisted primarily of market value adjustment on interest rate swaps following
the adoption of SFAS No. 133 on January 1, 2001.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Total operating revenues decreased by 25% to $365.2 million in 2002 from
$486.7 million in 2001. Time charter equivalent revenues decreased by 34% to
$271.2 million in 2002 compared with $411.5 million in 2001. In 2002, the
Company took delivery of four wholly owned double hull VLCCs. The decrease
reflects the significantly weaker tanker charter market in 2002 compared with
2001. The annual average daily TCEs earned by the Company's VLCCs, Suezmax
tankers, and Suezmax OBO carriers for 2002 were $22,200, $18,400 and $17,700,
respectively, compared with $34,600, $30,600 and $28,900, respectively, in 2001.
Spot voyage charters represented 85% and 92% of the Company's time charter
equivalent revenues in 2002 and 2001 respectively. The tanker market weakened
significantly in the first half of 2002 mainly as a result of the influence of a
global economic recession that began in 2001; the lingering effects on September
11 on the airline industry and the quota cuts imposed by OPEC which resulted in
an increase in short haul imports. Market conditions improved in the last
quarter of 2002 as demand for oil increased due to factors such as a colder than
normal winter, a gradual global economic recovery and the shutdown of nuclear
power plants in Japan resulting in increased consumption of fossil fuels.
Voyage expenses and commission increased by 25% from $75.2 million in 2001
to $94.0 million in 2002. This increase is primarily as a result of the
withdrawal of Frontline from participation in the Tankers International LLC pool
in July 2002. Under the pool arrangement, voyage costs and commission for
vessels entered in the pool were borne by the pool. After Frontline's withdrawal
from the pool these costs were borne by Frontline.
Vessel operating expenses, which include drydocking costs, decreased 4% to
$81.4 million from $85.1 million in 2001. This decrease was a result of a cost
saving initiative. The average daily operating costs, including drydockings, of
the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $7,211,
$5,972 and $5,711 respectively, compared with $7,012, $6,049 and $8,883,
respectively, in 2001. In 2002, 11 of the vessels went into drydock compared
with 15 in 2001. The decrease in daily operating costs for the Suezmax OBO
carriers was a result of seven out of the eight vessels having been drydocked in
2001.
Administrative expenses decreased 1% to $6.9 million in 2002 from $7.0
million in 2001. A reduction in non-cash charges in connection with employee
stock options offset expenses for an increased number of Frontline employees.
Depreciation and amortization increased 9% from $88.6 million in 2001 to
$96.8 million in 2002. The increase relates to the acquisition of four new
vessels in 2002 and the impact for a full year of the reduced expected useful
life for one of the Company's vessels following the implementation of IMO
regulations in 2001.
Net interest expense for 2002 was $33.6 million, a decrease of 38% compared
with $54.5 million in 2001. Interest expense decreased from $58.9 million in
2001 to $42.1 million in 2002. At December 31, 2002 the Company had $1,104.0
million of floating rate debt and the decrease in the interest expense reflects
the benefit of lower interest rates throughout 2002.
The share in result of associated companies decreased from earnings of
$14.3 million in 2001 to a loss of $10.1 million in 2002. Certain of the
associated companies in which the Company has investments have Yen denominated
long term debt. In 2002 the loss was due to a combination of lower revenues and
the strengthening of the Yen against the U.S. dollar with the resulting
unrealized loss included with the share in results of associated companies.
The Company incurred a foreign currency exchange loss of $5.6 million in
2002 compared with a gain of $6.2 million in 2001, as a result of the
strengthening of the Yen against the U.S. dollar from (Y)131.14 at December 31,
2001 to (Y)118.54 at December 31, 2002. At December 31, 2002, the Company had
Yen debt of (Y)5.1 billion, compared with (Y)5.6 billion at December 31, 2001.
The charge for other financial items decreased from $9.1 million in 2001 to
$4.5 million in 2002. In both years, other financial items consisted primarily
of market value adjustment on interest rate swaps following the adoption of SFAS
No. 133 on January 1, 2001. These mark to market valuation adjustments were $3.3
million and $8.6 million for 2002 and 2001, respectively.
The Company adopted FAS 142 effective January 1, 2002 and recognized an
impairment loss on goodwill of $14.1 million that is shown separately in the
consolidated statement of operations as a cumulative effect of change in
accounting principle. Net income for 2002 before the cumulative effect of change
in accounting principle was $32.2 million.
Results of Operations - Successor
Year ended December 31, 2003.
Administrative expenses consist of initial start up costs incurred by the
Company. Interest income consists of interest accruing on the net proceeds from
the offering. Interest expense consists of interest accruing on our issue of
$580 million of 8.5% Senior Notes due 2013 together with amortization of
capitalized fees associated with our offering.
Liquidity and Capital Resources
The Company operates in a capital intensive industry and has historically
financed its purchase of tankers and other capital expenditures through a
combination of cash generated from operations, equity capital and borrowings
from commercial banks. The liquidity requirements of the Company relate to
servicing its debt, funding the equity portion of investments in vessels,
funding working capital requirements and maintaining cash reserves against
fluctuations in operating cash flows. Revenues from time charters and bareboat
charters are received monthly or fortnightly in advance, while revenues from
voyage charters are received upon completion of the voyage.
The Company's funding and treasury activities are conducted within
corporate policies to maximize investment returns while maintaining appropriate
liquidity for the Company's requirements. Cash and cash equivalents are held
primarily in U.S. dollars, with some balances held in Japanese Yen, British
Pound and Norwegian Kroner.
Short-term liquidity requirements of the Company relate to servicing our
debt and funding working capital requirements. Sources of short-term liquidity
include cash balances, restricted cash balances, short-term investments and
receipts from our charters.
Long-term liquidity requirements of the Company included funding the equity
portion of investments in new or replacement vessels, and repayment of long-term
debt balances including our $580 million 8.5% Senior Notes due 2013 and our
$1.058 billion credit facility due 2010. Sources of funding our long-term
liquidity requirements includes new loans or equity issues.
We believe that our cash flow from the charters will be sufficient to fund
our anticipated debt service and working capital requirements for the short and
medium term. To the extent we determine to acquire additional vessels, we may
consider additional borrowings, and equity and debt issuances. Our long-term
liquidity requirements include repayment of the balance our secured credit
facility in 2010 and repayment of our issue of 8.5% Senior Notes in 2013. We may
require additional borrowings or issuances of equity in the long-term to meet
these requirements.
Liquidity and Capital Resources - Predecessor
As of December 31, 2003 and 2002, the Company had cash and cash equivalents
of $26.5 million, and $20.6 million, respectively. The Company generated cash
from operations of $415.5 million in 2003 compared with $115.7 million in 2002
and $307.2 million in 2001. Net cash used in investing activities in 2003 was
$51.6 million compared with net cash used in investing activities of $261.8
million in 2002 and $271.9 million in 2001. In 2003, investing activities
related primarily to $70 million in funding payments to the various investments
in associated companies, in addition to $17 million received as proceeds from
the sale of investments in associated companies. In 2002, the Company's
investing activities related to the acquisition of four VLCC's for an amount
totaling $249.3 million. In 2001, investing activities consisted primarily of
payments for three VLCC acquisitions, totaling $210.0 million.
Cash used in financing activities was $358.0 million at December 31, 2003
compared with cash provided by financing activities of $140.7 million in 2002
and cash used in financing activities of $24.5 million at December 31, 2001. In
2003 there were $178.2 million in principal repayments on long term debt
compared to principal repayments of $126.7 million and $228.7 million proceeds
from long term debt in 2002. In 2001 there were proceeds from long term debt of
$164.6 million and repayments of long term debt of $129.2 million. In 2003 there
was a net reduction of $178.8 million in the amount due to parent company
compared with an increase of $41.4 million in 2002 and a decrease of $59.5
million in 2001.
In July, 2003 the Company disposed of it interests in Golden Lagoon
Corporation and Ichiban Transport Corporation for proceeds of $17 million.
In June 2003, the Company acquired the remaining 50% of the shares in
Golden Tide Corporation for $9.5 million.
In July 2002, the Company acquired a 33% interest in a joint venture, which
acquired a 2002-built VLCC for approximately $78.5 million. At the same time,
$52.5 million of bank financing was secured for the joint venture.
In 2002, the Company took delivery of four vessels: Front Serenade; Front
Stratus; Front Page; and Front Falcon. In March 2002 the Company obtained bank
financing for a total sum of $150 million for the Front Serenade, Front Stratus
and Front Falcon. In August 2002, the Company obtained bank financing for a
total sum of $50 million for Front Page.
In February 2001, the Company acquired a 50.1% interest in a joint venture,
which acquired a VLCC built in 1993 for approximately $53.0 million. At the same
time, $35 million of financing was secured for this joint venture.
In 2001, the Company took delivery of three vessels that were acquired
through the exercise of purchase options; Front Commerce; Front Comanche; and
Opalia. In April 2001, the Company obtained bank financing for Front Commerce,
for a total amount of $55 million. In May 2001, the Company obtained bank
financing for a total sum of $59 million for the Front Comanche and in July
2001, obtained bank financing for a total sum of $50 million for Opalia.
The Company had total long term debt outstanding of $991.6 million at
December 31, 2003 compared with $1,106.8 million at December 31, 2002 and
$1,000.5 million at December 31, 2001. As of December 31, 2003, all of company's
debt was floating rate debt. The Company is exposed to various market risks,
including interest rates and foreign currency fluctuations. The Company uses
floating-to-fixed interest rate swaps to manage interest rate risk. The interest
rates swaps are used solely to hedge interest flow on the Company's debt
portfolio and are not used for speculative purposes. As at December 31, 2003,
the Company's interest rate swap arrangements effectively fixed the Company's
interest rate exposure on $152.6 million of floating rate debt (2002 $327.7
million, 2001 362.8 million). The interest rate swap agreements expire between
January 2006 and August 2008.
At December 31, 2003, the Company, on a predecessor combined carve-out basis,
had outstanding debt of $991.6 million which is repayable as follows:
December 31, 2003
-----------------
(dollars in thousands)
2004 141,522
2005 230,993
2006 205,044
2007 111,543
2008 and later 302,508
-----------------
Total debt $991,610
=================
Liquidity and Capital Resources - Successor
As of June 30, 2004 and December 31, 2003, the Company had cash and cash
equivalents (including restricted cash) of $40.0 million and $565.5 million,
respectively. At December 31, 2003 the $565.5 million cash balance represented
the net proceeds from our issue of 8.5% Senior Notes due 2013. The Company
generated cash from operations of $109.5 million in the six months ended June
30, 2004 compared with $241.9 million in the six months ended June 30, 2003.
On January 1, 2004, our agreements with the Charterer and the management
agreements and administrative services agreements that we entered into on
December 11, 2003 became effective. Under these agreements, we are contracted to
make and receive amounts that will impact our future liquidity requirements.
Based upon our current fleet of 46 vessels, and including the additional VLCC
under option from January 1, 2005, we estimate that we will receive
approximately $385.9 million under these contracts in 2004 and will be required
to pay approximately $110.9 million during the same period. For further
information on contractual operating cash flows, please refer to "Summary - Our
Contractual Cash Flow". In the six months ended June 30, 2004 we used $536.8
milion to acquire our vessel owning subsidiaries from Frontline.
As of June 30, 2004 and December 31, 2003, the Company on a stand-alone
basis had total long term debt outstanding of $1,554.3 million and $580.0
million, respectively. As at December 31, 2003 this amount consisted of our
issue of $580 million 8.5% Senior Notes due 2013. We expect interest expense on
the Notes to amount to $49.3 million per year and amortization of related
capitalized fees and expenses to amount to approximately $1.7 million per year.
In February 2004, we refinanced the existing debt on the vessels we acquired
from Frontline and entered into a new $1,058.0 million syndicated senior secured
credit facility. This facility bears interest at Libor plus 1.25% and is
repayable between 2004 and 2010 with a final bullet of $499.7 million payable on
maturity. This facility contains a minimum value covenant which requires that
the aggregate value of the Company's vessels exceed 140% of the outstanding
amount of the facility. Covenants contained in our secured loan agreements may
restrict our ability to obtain new secured facilities in future. We were in
compliance with all loan covenants at June 30, 2004. As at June 30, 2004 the
outstanding amount on this facility was $994.3 million.
In connection with its new $1,058.0 million syndicated senior secured
credit facility, the Company entered into new five year interest rate swaps with
a combined principal amount of $500.0 million in the first quarter of 2004.
These swaps are at rates between 3.3% and 3.5%.
The Company uses financial instruments to reduce the risk associated with
fluctuations in interest rates. The Company does not hold or issue instruments
for speculative or trading purposes.
In July 2004 the Company issued 1,600,000 common shares to an institutional
investor at a price of US$15.75 per share for total proceeds of US$25.2 million.
On August 19, 2004, the Board of Ship Finance declared a dividend of $0.35
per share. The record date for the dividend is August 30, 2004, ex dividend date
is August 26, 2004 and the dividend will be paid on September 13, 2004.
Contractual Commitments
At December 31, 2003, on a predecessor combined carve-out basis, the
Company had the following contractual obligations and commitments:
[Enlarge/Download Table]
Payment due by period
Less than 1 year 1 - 3 years 3 - 5 years After 5 years Total
-----------------------------------------------------------------------
In thousands of $ Borrowings 141,522 230,993 316,587 302,508 991,610
-----------------------------------------------------------------------
Total contractual cash obligations 141,522 230,993 316,587 302,508 991,610
-----------------------------------------------------------------------
At December 31, 2003, on a stand alone basis, the Company had no
contractual commitments other than those relating to our agreement to purchase
the Vessel Interests from Frontline and our issue of $580.0 million 8.5% Senior
Notes due 2013. These commitments are discussed in "Overview" above.
At June 30, 2004, the Company had the following contractual obligations and
commitments:
[Enlarge/Download Table]
Payment due by period
Less than 1 year 1 - 3 years 3 - 5 years After 5 years Total
-------------------------------------------------------------------------
In thousands of $
$580 million 8.5% notes (1) - - - 560,000 560,000
$1.058 billion credit facility 88,843 177,684 177,684 550,063 994,274
-------------------------------------------------------------------------
Total contractual cash obligations 88,843 177,684 177,684 1,110,063 1,554,274
-------------------------------------------------------------------------
(1) Includes $20 million in 8.5% Senior Notes repurchased by the Company in
2004.
INDUSTRY
The discussion of tanker industry statistics under this heading has been
compiled by P.F. Bass0e AS & Co., which has confirmed to us that they accurately
describe the international tanker market, subject to the availability and
reliability of the data supporting the statistical information presented. P.F.
Bass0e AS & Co.'s methodologies for collecting data, and therefore the data
collected, may differ from those of other sources, and its data does not reflect
all or even necessarily a comprehensive set of the actual transactions occurring
in the market.
Overview
The tanker industry provides crude oil transportation between oil producing
and consuming nations. Almost one-half of the world's crude oil production is
transported by sea. There are primarily two types of operators that provide
international seaborne oil and petroleum products transportation services: major
integrated oil companies with captive fleets (both private and state-owned) and
independent shipowners. Both types of operators transport oil under short-term
contracts (including single voyage spot charters) and long term time charters
with oil companies, oil traders, petroleum product producers and government
agencies. The oil companies use their fleets to transport their own oil as well
as to transport oil for third party charterers in direct competition with
independent shipowners in the tanker charter market.
Since the latter half of the 1990s, the market situation for tanker owners
has improved significantly. Several factors have contributed to this
improvement. Increased focus on vessel quality has been a main driver. Long seen
as a commodity market with little degree of differentiation between vessels and
owners, the industry began to change during the 1990s. This process was
triggered by the Exxon Valdez incident in 1989, which began the movement towards
double hull vessels and tighter industry regulations, including OPA. The
emergence of vessels equipped with double hulls represented a differentiation in
vessel quality and enabled such vessels to command higher rates in the spot
charter markets. The effect has been a shift in major charterers' preference
towards greater use of double hulls and, therefore, more difficult trading
conditions for older single hull vessels. These changes are reflected in the
increase in scrapping of older vessels during periods of weaker market
conditions in recent years. As a result, the net increase in transportation
capacity for Suezmax tankers and VLCCs has been low during this period.
Types of Tankers
The oil tanker fleet is generally divided into six major categories of
vessels, based on carrying capacity. To minimize the cost of shipping, tanker
charterers transporting crude oil will typically charter the largest vessel that
meets the specific port and canal size restrictions for the voyage. The six
types of vessels, categorized according to their size in dwt, are:
o ULCCs of approximately 320,000 dwt or more;
o VLCCs of approximately 200,000 to 320,000 dwt;
o Suezmax tankers of approximately 120,000 to 200,000 dwt;
o Aframax tankers of approximately 80,000 to 120,000 dwt;
o Panamax tankers of approximately 50,000 to 80,000 dwt; and
o Small tankers (such as Handysize) of less than approximately 50,000
dwt.
World Crude Oil Tanker Fleet by Type of Vessel
ULCCs and VLCCs provide the most efficient means of long haul
transportation, mainly transporting oil from the Arabian Gulf to Western Europe,
the United States and Asia. According to P.F. Bass0e, as of [October 31, 2003,
the cargo capacity of ULCCs and VLCCs represented approximately 55% of the
world's crude oil tanker fleet above 80,000 dwt.]
Suezmax tankers engage in both long- and medium-haul crude oil trades, such
as from West Africa and the North Sea to the United States. Aframax vessels
generally engage in both medium- and short-haul trades and carry crude oil or
petroleum products. As of October 31, 2003, data from P.F. Bass0e shows that the
cargo capacity of Aframax and Suezmax tankers represented approximately 24% and
20%, respectively, of the total world crude oil tanker fleet over 80,000 dwt.
Unlike smaller vessels, Aframax and Suezmax vessels are large enough to allow
them to benefit from economies of scale in some regional markets. They also have
access to a wide range of ports, many of which are not accessible by larger
vessels such as ULCCs and VLCCs, and are particularly well-suited for trading in
regional markets, including the Atlantic basin.
Panamax and smaller tankers mostly transport petroleum products in short-
to medium-haul trades.
Besides tankers, oil/bulk/ore (OBO) carriers are vessels that are capable
of carrying either crude oil or dry bulk cargoes. As a result of being able to
transport more than one type of cargo, OBOs can have a higher utilization and
charter rates over a similar size tanker.
Tanker Demand Drivers
Overview
Tanker demand is derived from a combination of factors, including world oil
supply and demand, and the geographic locations of oil production, refinement
and consumption. Tanker demand is generally expressed in "ton-miles" and is
measured as the product of (1) cargo volume, usually measured in metric tons,
and (2) the distance over which this oil is transported.
Tanker demand is a function of global trends in oil consumption and oil
production, with a particular emphasis on the geographic location of both the
consumers and the producers. Consumption and production trends are in turn
influenced by a combination of economic growth, oil prices, weather conditions
and long term geological profiles. Tonnage of oil shipped is also influenced by
the cost and availability of transportation alternatives such as pipelines.
Oil Demand
Oil demand has grown at a compound annual growth rate of 1.5% over the past
ten years. In addition, oil demand has consistently grown every year for over 40
years, except for two periods: 1974 to 1975 and 1980 to 1983. Demand growth was
weak in the early part of this decade following the sharp increase in oil prices
since 1999 and the ensuing recession in industrialized countries. During the
past year growth has increased, led by strong economic performance in China and
the recovery in the United States. The International Energy Agency, or IEA,
recently upgraded its outlook for global demand growth through 2005. The IEA
expects world oil demand to increase by 2.53 million barrels per day (mbd), or
3.2%, in 2004 and 1.8 mbd, or 2.2%, in 2005. Longer-term, the IEA expects global
oil demand to grow at an overall rate of 1.6% per year. Growth in the mature
OECD regions is expected to be less than 1.0% per year while growth in the
emerging Asian economies is expected to be between 3.0% and 4.0% per year. Given
that the region is a net importer on oil, we expect this trend to result in
increased tanker demand.
Oil production and reserves
There are significant differences in reserves, geological profiles, and
production costs in the various oil producing regions of the world. While swings
in oil prices, technological advances and government energy policies can
influence production trends in the short- to medium-term, the level of oil
reserves will ultimately determine production trends in the long term.
Countries in the Middle East have nearly twice the proved reserves of all
of the other countries combined, which will continue to drive long- and
medium-haul seaborne transportation.
World oil production is expected to reach approximately 83 mbd in 2004.
OPEC countries located in the Middle East are expected to supply approximately
34% of this volume. Given the dominance of world oil reserves located in this
region, this share is expected to grow in coming years as oil fields in other
parts of the world gradually reach maturity and begin a process of natural
decline. The length of transportation distances between the Middle East and
consuming areas means that such a trend would boost ton-miles and would be
beneficial for tanker demand.
Seaborne Transportation of Crude Oil
Seaborne transportation of oil has grown on average by 2.7% per year over
the past decade, which is nearly twice as fast as the rate of growth in oil
demand over the same period. The higher rate of growth for seaborne oil trade
illustrates that while total trade is roughly 60% of total oil demand, virtually
all of the increase in consumption from year to year has to be transported.
Major consumers, producers, importers and exporters of oil
The United States is the largest consumer and importer of oil, and China is
the fastest growing importer of oil. The Middle East and the former Soviet
Union, or FSU, are the largest producers and, together with the North Sea, the
largest exporters of oil, making them the primary drivers of long- and
medium-haul seaborne transportation. The FSU is the fastest growing exporter of
crude oil and generates demand for medium-haul transportation.
Crude Oil Trading Patterns
The distance over which oil is transported by sea reflects prevailing
seaborne trading and distribution patterns. These patterns are in turn a
function of the optimal economic distribution of that production for refining
and consumption, as dictated by, among other things, the level of spot and
forward oil prices, the price between different crude oil qualities, refining
margins and freight rates. Seaborne trading patterns also are influenced by
geopolitical events that divert tankers from normal trading patterns, as well as
by inter-regional oil trading activity created by global oil supply and demand
imbalances. The Middle East is the only region in the world that holds
significant volumes of excess oil production capacity. Production volumes from
this region fluctuate in line with OPEC's attempts to keep world oil prices
steady. Because the Middle East is the main loading area for VLCCs, these output
swings have a direct and significant bearing on the VLCC freight market.
Crude Oil Inventories
The level of oil inventories is an important element of tanker demand
because it indicates the available cushion in the oil industry to absorb
unexpected events. Typically, low inventories will raise the importance of
tanker transportation in providing incremental supply to meet higher oil demand
or shortfalls in production. Currently, U.S. commercial oil inventories (crude
and products) are [near their five year lows] and OECD commercial oil
inventories are in the bottom half of their five year range at approximately
[1,200 and 2,590] million barrels, respectively. This decrease has taken place
over a protracted period and reflects both major oil companies' drive to reduce
capital employed as well as OPEC's desire for higher oil prices. The result for
the tanker industry has been that its role in the supply logistics of the oil
market has increased.
Demand for oil fluctuates with the different seasons and in response to
price swings and unforeseen events. As inventory levels have declined, producers
with excess capacity have been relied upon to balance such swings. These
producers are mainly located in the Middle East and are net exporters of oil,
which means demand for tankers increasingly has become a part of such
fluctuations.
Continued low inventories would in all likelihood result in continued
volatility in tanker rates as demand for tonnage responds to swings in regional
oil balances. A general increase in inventory levels would likely reduce this
volatility but would involve a period of above-trend tanker demand.
Tanker Supply Drivers
Overview
The supply of tankers increases with deliveries of newbuildings, and
decreases with scrapping of older vessels and loss of tonnage as a result of
casualties and conversion of vessels to other uses, such as floating production
and storage facilities. A tanker's size is measured in dwt, which is the amount
of crude oil measured in metric tons that the vessel is capable of loading. The
supply of tankers is measured both in the number of vessels and in aggregate
dwt.
Newbuildings
Typically, newbuildings are delivered 18 months after they are ordered,
depending on the available capacity of the shipyard. Shipyard capacity for the
rest of 2004, 2005 and part of 2006 has already been committed and, as a result,
a large tanker ordered today is unlikely to be delivered until 2007.
Scrapping
Vessel owners often conclude that it is more economical to scrap a vessel
that has exhausted its useful life than to upgrade the vessel to maintain it
in-class. A vessel is deemed to be "in-class" if the surveyors of a
classification society determine that the vessel conforms to the standards and
rules of that classification society. In many cases, particularly when tankers
reach 25 years of age, the costs of conducting the special survey and performing
associated repairs, such as the replacement of steel plate, in order to maintain
a vessel in-class may not be economically efficient. Customers, insurance
companies and other industry participants use the survey and classification
regime to obtain reasonable assurance of a vessel's seaworthiness, and vessels
must be certified as in-class in order to continue to trade (i.e., to be
admitted to ports worldwide). In addition, regulations set by the IMO impose
significant restrictions on tankers trading beyond 25 years of age.
Scrapping of most of the vessels delivered in the mid-1970s, as they near
the end of their useful lives, in conjunction with customers' preference for
younger vessels, has changed the tanker business in recent years and is expected
to continue to do so during the next several years. Factors affecting the amount
of tonnage scrapped include market conditions and second hand vessel values in
relation to scrap prices. Scrap prices are currently at a modern-day high of
$420 per light weight ton, or the weight of the tanker unloaded. According to
P.F. Bass0e, approximately 8 million dwt of VLCC tankers and 1.6 million dwt of
Suezmax tankers were scrapped during 2003.
Deliveries and Scrapping of VLCC and Suezmax Tankers
Despite the large number of newbuildings delivered in the past two years,
the size of the VLCC and Suezmax tanker fleets have remained relatively
constant. Increased focus on environmental and safety concerns has led to
increased scrapping to offset the increase in newbuilding deliveries, creating
greater stability in tanker supply. In 2003, there was a net increase in the
global VLCC fleet of 6 vessels or 1.3 million dwt and 2004 is expecting a net
increase of approximately 20 vessels for an estimated total of 5.1 million dwt.
Since 1999, there has been a net increase in the global VLCC fleet of 2.0
million dwt, or approximately 0.5% growth per year. Suezmax net supply has
increased by approximately 2.8 million dwt, or about 1.7% per year. The Suezmax
world fleet is estimated to receive net additions of 13-14 ships in 2004. The
marginal increase in world fleet growth was absorbed through increased tanker
demand, which grew by more than 3.0% per year over the same time period, driven
in part by a 7.0% increase in long-haul movements from the Middle East.
BUSINESS
Overview
We were formed in October of 2003 as a wholly owned subsidiary of
Frontline, which is one of the largest owners and operators of large crude oil
tankers in the world. On June 16, 2004 Frontline distributed 25% of our common
shares to its shareholders, with each Frontline shareholder receiving one of our
common shares for every four Frontline shares held. On June 17, 2004, our common
shares began trading on the New York Stock Exchange under the ticker symbol
"SFL".
We have purchased from Frontline a fleet of 46 crude oil tankers, which we
have chartered under long term, fixed rate charters to Frontline Shipping
Limited, which we refer to as the Charterer and the option to purchase an
additional vessel. The Charterer was initially capitalized with $250 million in
cash provided by Frontline to support its obligation to make payments to us
under the charters. We have also entered into fixed rate management and
administrative services agreements with Frontline Management (Bermuda) Limited,
or Frontline Management, to provide for the operation and maintenance of our
vessels and administrative support services. These arrangements are intended to
provide us with stable cash flow and reduce our exposure to volatility in the
markets for seaborne oil transportation services.
We have acquired from Frontline 23 VLCCs, including the VLCC under option,
each having a capacity of 275,000 to 308,000 dwt, and 24 Suezmax tankers, each
having a capacity of 142,000 to 169,000 dwt. Our fleet is one of the largest
tanker fleets in the world, with a combined deadweight tonnage of 10.5 million
dwt, and has an average age of 8.6 years as of December 31, 2003. Thirteen of
our VLCCs and 16 of our Suezmax tankers are of double hull construction, with
the remainder being modern single hull or double sided vessels built since 1990.
Eight of our Suezmax tankers are oil/bulk/ore carriers, or OBO carriers, which
can be configured to carry either oil or dry cargo as market conditions warrant.
Strategy
Our long term charters with the Charterer are our sole source of operating
income. We plan to grow our fleet and to replace vessels as they are retired
with modern double hull vessels to maintain stable cash flow and the quality of
our fleet. We expect that our replacement and growth vessels will be either
existing or newly built VLCC or Suezmax tankers. Depending on market conditions,
we may charter our additional vessels on long or short term time charters or in
the spot markets. We may also seek to diversify our customer base by securing
charters with companies other than the Charterer.
Competitive Strengths
We believe that our fleet, together with our contractual arrangements with
Frontline and its affiliates, give us a number of competitive strengths,
including:
o one of the largest and most modern VLCC and Suezmax fleets in the
world;
o fixed rate, long term charters intended to reduce our exposure to
volatility in tanker rates;
o profit sharing potential when the Charterer's earnings from
deploying our vessels exceed certain levels;
o substantially fixed operating costs under our management
agreements;
o a charter counterparty initially capitalized with $250 million to
support its obligation to make charter payments to us; and
o vessels managed by Frontline Management, one of the industry's
most experienced operators of tankers.
Charter Arrangements
Time Charters
We have chartered the vessels we acquired from Frontline to the Charterer
under long term time charters, which will extend for various periods depending
on the age of the vessels, ranging from approximately seven to 23 years. We
refer you to "Our Fleet" below for the relevant charter termination dates for
each of our vessels. Eleven of the vessels that we acquired are on current long
term time charters and three vessels are on current long term bareboat charters.
We have agreed with the Charterer that it will treat all of these vessels as
being under time charters with us, on the same terms and effective on the same
dates as with the other 32 vessels for all economic purposes. If the current
underlying charterer defaults, the Charterer will continue to perform the
economic terms of the charters with us. On redelivery of a vessel from its
underlying charter, that vessel will be deemed delivered under the Charterer's
charter with us for the rest of its term.
With the exceptions described below, the daily base charter rates, which
are payable to us monthly in advance for a maximum of 360 days per year (361
days per leap year), are as follows:
Year VLCC Suezmax
---- ---- -------
2003 to 2006...................................... $25,575 $21,100
2007 to 2010...................................... $25,175 $20,700
2011 and beyond................................... $24,175 $19,700
The daily base charter rates for vessels that reach their 18th delivery date
anniversary, in the case of non-double hull vessels, or their 20th delivery date
anniversary, in the case of double hull vessels, will decline to $18,262 per day
for VLCCs and $15,348 for Suezmax tankers after such dates, respectively.
In addition, the base charter rate for our non-double hull vessels will
decline to $7,500 per day after 2010, at which time the Charterer will have the
option to terminate the charters for those vessels. Each charter also provides
that the base charter rate will be reduced if the vessel does not achieve the
performance specifications set forth in the charter. The related management
agreement provides that Frontline Management will reimburse us for any such
reduced charter payments. The Charterer has the right under a charter to direct
us to bareboat charter the related vessel to a third party. During the term of
the bareboat charter, the Charterer will continue to pay us the daily base
charter rate for the vessel, less $6,500 per day. The related management
agreement provides that our obligation to pay the $6,500 fixed fee to Frontline
Management will be suspended for so long as the vessel is bareboat chartered.
Under the charters we are required to keep the vessels seaworthy, and to
crew and maintain them. Frontline Management performs those duties for us under
the management agreements described below. If a structural change or new
equipment is required due to changes in classification society or regulatory
requirements, the Charterer may make them, at its expense, without our consent,
but those changes or improvements will become our property. The Charterer is not
obligated to pay us charterhire for off hire days in excess of five off hire
days per year per vessel calculated on a fleet-wide basis, which include days a
vessel is unable to be in service due to, among other things, repairs or
drydockings. However, under the management agreements described below, Frontline
Management will reimburse us for any loss of charter revenue in excess of five
off hire days per vessel, calculated on a fleet-wide basis.
The terms of the charters do not provide the Charterer with an option to
terminate the charter before the end of its term, other than with respect to our
non-double hull vessels after 2010. We may terminate any or all of the charters
in the event of an event of default under the charter ancillary agreement that
we describe below. The charters may also terminate in the event of (1) a
requisition for title of a vessel or (2) the total loss or constructive total
loss of a vessel. In addition, each charter provides that we may not sell the
related vessel without the Charterer's consent.
The Charterer
The Charterer's activities are limited in its organizational documents to
chartering our vessels and any business necessary or incidental to that purpose.
Under its constituent documents, the Charterer is not permitted to engage in
other businesses or activities and is required to have at least one independent
director on its board of directors whose consent will be required to file for
bankruptcy, liquidate or dissolve the Charterer, merge or sell all or
substantially all of the Charterer's assets. The Charterer is also required
under its constituent documents to maintain, among other things, its corporate
separateness from its affiliates, to maintain books, records and accounts
separate from any other entities, to observe all corporate formalities, not to
co-mingle its assets, to maintain an arm's-length relationship with its
affiliates and not to guarantee or become obligated for the debts of any other
entity.
Charter Ancillary Agreement
We have entered into a charter ancillary agreement with the Charterer, our
vessel owning subsidiaries that own our vessels and Frontline, which remains in
effect until the last long term charter with the Charterer terminates in
accordance with its terms. Frontline has guaranteed the Charterer's obligations
under the charter ancillary agreement.
Charter Service Reserve. Frontline has made an initial capital contribution to
the Charterer in the amount of $250 million in cash. These funds are being held
as a charter service reserve to support the Charterer's obligation to make
charter payments to us under the charters. The Charterer is entitled to use the
charter service reserve only (1) to make charter payments to us and (2) for
reasonable working capital to meet short term voyage expenses. The Charterer is
required to provide us with monthly certifications of the balances of and
activity in the charter service reserve.
Material Covenants. Pursuant to the terms of the charter ancillary agreement,
the Charterer has agreed not to pay dividends or other distributions to its
shareholders or loan, repay or make any other payment in respect of indebtedness
of the Charterer or any of its affiliates (other than us or our wholly owned
subsidiaries), unless (1) the Charterer is then in compliance with its
obligations under the charter ancillary agreement, (2) after giving effect to
the dividend or other distribution, (A) it remains in compliance with such
obligations, (B) the balance of the charter service reserve equals at least $250
million (which threshold will be reduced by $5.3 million upon the termination of
each charter other than by reason of a default by the Charterer), which we refer
to as the "Minimum Reserve", and (C) it certifies to us that it reasonably
believes that the charter service reserve will be equal to or greater than the
Minimum Reserve level for at least 30 days after the date of that dividend or
distribution, taking into consideration the Charterer's reasonably expected
payment obligations during such 30-day period, (3) any charter payments deferred
pursuant to the deferral provisions described below by the Charterer have been
fully paid to us and (4) any profit sharing payments deferred by the Charterer
pursuant to the profit sharing payments provisions described below have been
fully paid to us. In addition, the Charterer has agreed to certain other
restrictive covenants, including restrictions on its ability to, without our
consent:
o amend its organizational documents in a manner that would
adversely affect us;
o violate its organizational documents;
o engage in businesses other than the operation and chartering of
our vessels;
o incur debt, other than in the ordinary course of business;
o sell all or substantially all of its assets or the assets of any
of its subsidiaries or enter into any merger, consolidation or
business combination transaction;
o enter into transactions with affiliates, other than on an
arm's-length basis;
o permit the incurrence of any liens on any of its assets, other
than liens incurred in the ordinary course of business;
o issue any capital stock to any person or entity other than
Frontline; and
o make any investments in, provide loans or advances to, or grant
guarantees for the benefit of any person or entity other than in
the ordinary course of business.
In addition, Frontline has agreed that it will cause the Charterer at all times
to remain its wholly owned subsidiary.
Deferral of Charter Payments. For any period during which the cash and cash
equivalents held by the Charterer are less than $75 million, the Charterer is
entitled to defer from the payments payable to us under each charter up to
$4,600 per day for each of our vessels that is a VLCC and up to $3,400 per day
for each of our vessels that is a Suezmax, in each case without interest.
However, no such deferral with respect to a particular charter may be
outstanding for more than one year at any given time. The Charterer will be
required to immediately use all revenues that the Charterer receives that are in
excess of the daily charter rates payable to us to pay any deferred amounts at
such time as the cash and cash equivalents held by the Charterer are greater
than $75 million, unless the Charterer reasonably believes that the cash and
cash equivalents held by the Charterer will not exceed $75 million for at least
30 days after the date of the payment. In addition, the Charterer will not be
required to make any payment of deferred charter amounts until the payment would
be at least $2 million.
Profit Sharing Payments. Under the terms of the charter ancillary agreement,
beginning with the final 11-month period in 2004 and for each calendar year
after that, the Charterer has agreed to pay us a profit sharing payment equal to
20% of the charter revenues for the applicable period, calculated annually on a
TCE basis, realized by the Charterer for our fleet in excess of a weighted
average rate of $25,575 per day for each VLCC and $21,100 per day for each
Suezmax tanker. After 2010, all of our non-double hull vessels will be excluded
from the annual profit sharing payment calculation. For purposes of calculating
bareboat revenues on a TCE basis, expenses are assumed to equal $6,500 per day.
The Charterer has agreed to use its commercial best efforts to charter our
vessels on market terms and not to give preferential treatment to the marketing
of any other vessels owned or managed by Frontline or its affiliates.
The Charterer is entitled to defer, without interest, any profit sharing
payment to the extent that, after giving effect to the payment, the charter
service reserve would be less than the Minimum Reserve. The Charterer is
required to immediately use all revenues that the Charterer receives that are in
excess of the daily charter rates payable to us to pay any deferred profit
sharing amounts at such time as the charter service reserve exceeds the minimum
reserve, unless the Charterer reasonably believes that the charter service
reserve will not exceed the minimum reserve level for at least 30 days after the
date of the payment. In addition, the Charterer will not be required to make any
payment of deferred profit sharing amounts until the payment would be at least
$2 million.
Collateral Arrangements. The charter ancillary agreement provides that the
obligations of the Charterer to us under the charters and the charter ancillary
agreement are secured by a lien over all of the assets of the Charterer and a
pledge of the equity interests in the Charterer.
Default. An event of default shall be deemed to occur under the charter
ancillary agreement if:
o the Charterer materially breaches any of its obligations under
any of the Charters,
o the Charterer or Frontline materially breaches any of its
obligations under the charter ancillary agreement or the
Frontline performance guarantee,
o Frontline Management materially breaches any of its obligations
under any of the management agreements or
o the Charterer fails at any time to hold at least $55 million in
cash and cash equivalents.
The occurrence of any event of default under the charter ancillary
agreement that continues for 30 days after notice, we may elect to:
o terminate any or all of the charters,
o foreclose on any or all of our security interests described above
and/or
o pursue any other available rights or remedies.
Management and Administrative Services Agreements
Vessel Management Agreements
Our vessel owning subsidiaries entered into fixed rate management
agreements with Frontline Management. Under the management agreements, Frontline
Management is responsible for all technical management of the vessels, including
crewing, maintenance, repair, certain capital expenditures, drydocking, vessel
taxes and other vessel operating expenses. In addition, if a structural change
or new equipment is required due to changes in classification society or
regulatory requirements, Frontline Management will be responsible for making
them, unless the Charterer does so under the charters. We expect that Frontline
Management will outsource many of these services to third party providers.
Frontline Management is also obligated under the management agreements to
maintain insurance for each of our vessels, including marine hull and machinery
insurance, protection and indemnity insurance (including pollution risks and
crew insurances) and war risk insurance. Frontline Management will also
reimburse us for all lost charter revenue caused by our vessels being off hire
for more than five days per year on a fleet-wide basis or failing to achieve the
performance standards set forth in the charters. Under the management
agreements, we will pay Frontline Management a fixed fee of $6,500 per day per
vessel for all of the above services, for as long as the relevant charter is in
place. If the Charterer exercises its right under a charter to direct us to
bareboat charter the related vessel to a third party, the related management
agreement provides that our obligation to pay the $6,500 fixed fee to Frontline
Management will be suspended for so long as the vessel is bareboat chartered.
Both we and Frontline Management have the right to terminate any of the
management agreements if the relevant charter has been terminated.
Frontline has guaranteed to us Frontline Management's performance under
these management agreements.
Administrative Services Agreement
We have entered into an administrative services agreement with Frontline
Management and our vessel owning subsidiaries under which Frontline Management
provides us and our vessel owning subsidiaries with administrative support
services such as the maintenance of our corporate books and records, payroll
services, the preparation of tax returns and financial statements, assistance
with corporate and regulatory compliance matters not related to our vessels,
legal and accounting services, assistance in complying with United States and
other relevant securities laws, obtaining non-vessel related insurance, if any,
cash management and bookkeeping services, development and monitoring of internal
audit controls, disclosure controls and information technology, furnishing any
reports or financial information that might be requested by us and other
non-vessel related administrative services. Under this agreement Frontline
Management also provides us and our vessel owning subsidiaries with office space
in Bermuda. We and our vessel owning subsidiaries pay Frontline Management a
fixed fee of $20,000 each per year for its services under the agreement, and
reimburse Frontline Management for reasonable third party costs, including
directors fees and expenses, shareholder communications and public relations,
registrars, audit, legal fees and listing costs, if Frontline Management
advances them on our behalf. Before any public equity offering by us, neither
party may terminate this agreement for a period of two years without cause, but
after two years or after public equity offering either party may terminate the
agreement on 180 days' notice.
Because Frontline Management has assumed full managerial responsibility for
our fleet and our administrative services, we currently do not have separate
management or employees. We do, however, have one director who is not affiliated
with Frontline.
Frontline guarantees to us Frontline Management's performance under this
administrative services agreement.
Frontline Performance Guarantee
Frontline has issued a performance guarantee with respect to the charters,
the charter ancillary agreement, the management agreements and the
administrative services agreement. Pursuant to the performance guarantee,
Frontline has guaranteed the following obligations of the Charterer and
Frontline Management:
o the performance of the obligations of the Charterer under the
charters with the exception of payment of charter hire, which
will not be guaranteed,
o the performance of the obligations of the Charterer under the
charter ancillary agreement,
o the performance of the obligations of Frontline Management under
the management agreements, provided, however, that Frontline's
obligations with respect to indemnification for environmental
matters shall not extend beyond the protection and indemnity
insurance coverage with respect to any vessel required by us
under the management agreements, and
o the performance of the obligations of Frontline Management under
the administrative services agreement.
Frontline's performance guarantee shall remain in effect until all
obligations of the Charterer or Frontline Management, as the case may be, that
have been guaranteed by Frontline under the performance guarantee have been
performed and paid in full.
Our Fleet
The following chart summarizes certain information about the 47 vessels,
including the vessel under option, we acquired from Frontline:
[Enlarge/Download Table]
Year Charter Termination
Vessel Built Dwt. Construction Flag Date December 31,
------ ----- ---- ------------ ---- --------------------
VLCCs
Front Sabang............ 1990 286,000 Single hull Singapore 2014(1)
Front Vanadis........... 1990 286,000 Single hull Singapore 2014(1)
Front Highness.......... 1991 284,000 Single hull Singapore 2014(1)
Front Lady.............. 1991 284,000 Single hull Singapore 2014(1)
Front Lord.............. 1991 284,000 Single hull Singapore 2014(1)
Front Duke.............. 1992 284,000 Single hull Singapore 2014(1)
Front Duchess........... 1993 284,000 Single hull Singapore 2014(1)
Front Ace............... 1993 276,000 Single hull Liberia 2014(1)
Edinburgh............... 1993 302,000 Double side Liberia 2016(1)
Navix Astral............ 1996 276,000 Single hull Panama 2014(1)
Front Vanguard.......... 1998 300,000 Double hull Marshall Islands 2021
Front Vista............. 1998 300,000 Double hull Marshall Islands 2021
Omala................... 1999 306,000 Double hull Isle of Man 2022
Opalia.................. 1999 302,000 Double hull Isle of Man 2022
Front Comanche.......... 1999 300,000 Double hull France 2022
Ocana................... 1999 300,000 Double hull Isle of Man 2022
Oscilla (2)............. 2000 302,000 Double hull Isle of Man 2024
Ariake.................. 2001 298,000 Double hull Bahamas 2024
Front Serenade.......... 2002 299,000 Double hull Liberia 2025
Front Stratus........... 2002 299,000 Double hull Liberia 2025
Front Falcon............ 2002 308,000 Double hull Bahamas 2025
Front Page.............. 2002 299,000 Double hull Liberia 2025
Otina................... 2002 296,000 Double hull Isle of Man 2025
Suezmax OBO Carriers
Front Breaker........... 1991 169,000 Double hull Marshall Islands 2015
Front Climber........... 1991 169,000 Double hull Singapore 2015
Front Driver............ 1991 169,000 Double hull Marshall Islands 2015
Front Guider............ 1991 169,000 Double hull Singapore 2015
Front Leader............ 1991 169,000 Double hull Singapore 2015
Front Rider............. 1992 169,000 Double hull Singapore 2016
Front Striver........... 1992 169,000 Double hull Singapore 2016
Front Viewer............ 1992 169,000 Double hull Singapore 2016
Suezmax Tankers
Front Lillo............. 1991 147,000 Single hull Marshall Islands 2014(1)
Front Birch............. 1991 152,000 Double side Marshall Islands 2015(1)
Front Maple............. 1991 152,000 Double side Marshall Islands 2015(1)
Front Granite........... 1991 142,000 Single hull Marshall Islands 2014(1)
Front Emperor........... 1992 147,000 Single hull Singapore 2014(1)
Front Sunda............. 1992 142,000 Single hull Marshall Islands 2014(1)
Front Spirit............ 1993 147,000 Single hull Marshall Islands 2014(1)
Front Comor............. 1993 142,000 Single hull Norway 2014(1)
Front Pride............. 1993 150,000 Double hull Norway 2017
Front Glory............. 1995 150,000 Double hull Norway 2018
Front Splendour......... 1995 150,000 Double hull Norway 2018
Front Ardenne........... 1997 153,000 Double hull Norway 2020
Front Brabant........... 1998 153,000 Double hull Norway 2021
Mindanao................ 1998 158,000 Double hull Singapore 2021
Front Fighter........... 1998 153,000 Double hull Norway 2021
Front Hunter............ 1998 153,000 Double hull Norway 2021
----------
(1) Charter subject to termination at the Charterer's option after 2010.
(2) We have acquired an option to purchase the Oscilla from Seacrest Shipping
Ltd. As of the date of this prospectus we have not exercised the option.
Other than our interests in the vessels described above, we do not own any
material physical properties.
Our Contractual Cash Flow
The following table sets forth the aggregate contracted charter revenue
that is payable to us under our charters with the Charterer, together with the
management fees that are payable by us under the management agreements and the
administrative services agreement, but does not include any debt service or
other expenses. These figures do not include any profit sharing payments. These
amounts are based on our current fleet of 46 vessels and include the additional
VLCC under option from January 1, 2005. These amounts further assume that we do
not make any other vessel acquisitions. This table assumes that all parties
fully perform their obligations under the relevant agreements and that none of
the charters are terminated due to loss of the vessel or otherwise, except for
the charters for our non-double hull vessels, which are assumed to be terminated
after 2010. We cannot assure you that these results will actually be achieved.
Management and Net
Charter Administrative Contracted
Year Payments Fees Cash Payments
---- -------- -------- --------
(dollars in millions)
2004a ...................... $395.1 $113.3 $281.9
2005a ...................... 394.1 112.9 281.2
2006a ...................... 394.1 112.9 281.2
2007a ...................... 387.3 112.9 274.3
2008a ...................... 388.4 113.3 275.1
2009a ...................... 383.0 112.9 270.1
2010a ...................... 370.4 112.9 257.5
2011a ...................... 226.6 69.9 156.7
2012a ...................... 219.4 70.1 149.3
2013a ...................... 214.1 69.9 144.2
2014 and beyond ............ 1,517.7 496.8 1,020.3
Total ...................... $4,880.4 $1,495.4 $3,385.0
Risk of Loss and Insurance
Our operations may be affected by a number of risks, including mechanical
failure of the vessels, collisions, property loss to the vessels, cargo loss or
damage and business interruption due to political circumstances in foreign
countries, hostilities and labor strikes. In addition, the operation of any
ocean- going vessel is subject to the inherent possibility of catastrophic
marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
Frontline Management is responsible for arranging for the insurance of our
vessels on terms specified in the management agreements, which we believe are in
line with standard industry practice. In accordance with that practice,
Frontline Management has procured marine hull and machinery and war risks
insurance, which includes the risk of actual or constructive total loss, and
protection and indemnity insurance with mutual assurance associations.
Currently, the amount of coverage for liability for pollution, spillage and
leakage available to us on commercially reasonable terms through protection and
indemnity associations and providers of excess coverage is $1 billion per vessel
per occurrence. Protection and indemnity associations are mutual marine
indemnity associations formed by shipowners to provide protection from large
financial loss to one member by contribution towards that loss by all members.
We believe that our current insurance coverage is adequate to protect us
against the accident-related risks involved in the conduct of our business and
that we maintain appropriate levels of environmental damage and pollution
insurance coverage, consistent with standard industry practice. However, there
is no assurance that all risks are adequately insured against, that any
particular claims will be paid or that we will be able to procure adequate
insurance coverage at commercially reasonable rates in the future.
Inspection by a Classification Society
All of our tankers have been certified as being "in-class" by the
classification societies that inspect our vessels. Each of these classification
societies is a member of the International Association of Classification
Societies. Every commercial vessel's hull and machinery is evaluated by a
classification society authorized by its country of registry. The classification
society certifies that the vessel has been built and maintained in accordance
with the rules of the classification society and complies with applicable rules
and regulations of the vessel's country of registry and the international
conventions of which that country is a member. Each vessel is inspected by a
surveyor of the classification society in three surveys of varying frequency and
thoroughness: every year for the annual survey, every two to three years for
intermediate surveys and every four to five years for special surveys. Should
any defects be found, the classification surveyor will issue a "recommendation"
for appropriate repairs which have to be made by the shipowner within the time
limit prescribed. Vessels may be required, as part of the annual and
intermediate survey process, to be drydocked for inspection of the underwater
portions of the vessel and for necessary repair stemming from the inspection.
Special surveys always require drydocking.
Environmental Regulation
Government regulation significantly affects the ownership and operation of
our tankers. They are subject to international conventions, national, state and
local laws and regulations in force in the countries in which our tankers may
operate or are registered. Under our management agreements, Frontline Management
has assumed full managerial responsibility for our fleet, including compliance
with all government and other regulations. If our management agreements with
Frontline Management terminate, we would assume responsibility for managing our
vessels, including compliance with the regulations described herein and any
costs associated with such compliance.
A variety of governmental and private entities subject our tankers to both
scheduled and unscheduled inspections. These entities include the local port
authorities (U.S. Coast Guard, harbor master or equivalent), classification
societies, flag state administration (country of registry) and charterers,
particularly terminal operators and oil companies. Certain of these entities
require us to obtain permits, licenses and certificates for the operation of our
tankers. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one or more of our
tankers.
We believe that the heightened level of environmental and quality concerns
among insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all tankers and may accelerate the
scrapping of older tankers throughout the industry. Increasing environmental
concerns have created a demand for tankers that conform to the stricter
environmental standards. Frontline Management is required to maintain operating
standards for all of our tankers that will emphasize operational safety, quality
maintenance, continuous training of our officers and crews and compliance with
U.S. and international regulations. We believe that the operation of our vessels
are in substantial compliance with applicable environmental laws and
regulations; however, because such laws and regulations are frequently changed
and may impose increasingly stricter requirements, we cannot predict the
ultimate cost of complying with these requirements, or the impact of these
requirements on the resale value or useful lives of our tankers.
International Maritime Organization
In 1992, the International Maritime Organization, or IMO (the United
Nations agency for maritime safety and the prevention of marine pollution by
ships) adopted regulations that set forth pollution prevention requirements
applicable to tankers. These regulations, which have been adopted by over 150
nations, including many of the jurisdictions in which our tankers operate,
provide, in part, that:
o tankers between 25 and 30 years old must be of double hull
construction or of a mid-deck design with double sided
construction, unless (1) they have wing tanks or double-bottom
spaces not used for the carriage of oil, which cover at least 30%
of the length of the cargo tank section of the hull or bottom; or
(2) they are capable of hydrostatically balanced loading (loading
less cargo into a tanker so that in the event of a breach of the
hull, water flows into the tanker, displacing oil upwards instead
of into the sea);
o tankers 30 years old or older must be of double hull construction
or mid-deck design with double sided construction; and
o all tankers are subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double hull construction
or a mid-deck design with double sided construction or be of another approved
design ensuring the same level of protection against oil pollution if the
tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after
January 6, 1994; or
o completes a major conversion or is a newbuilding delivered on or
after July 6, 1996.
Effective September 2002, the IMO accelerated its existing timetable for
the phase-out of single hull oil tankers. These regulations require the
phase-out of most single hull oil tankers by 2015 or earlier, depending on the
age of the tanker and whether it has segregated ballast tanks. After 2007, the
maximum permissible age for single hull tankers will be 26 years. Fifteen of our
vessels are single hull tankers that were built in 1990 or later. Under the
IMO's current regulations, these tankers and our three double sided tankers will
be able to operate until 2015 before being required to be scrapped or
retrofitted to conform to international environmental standards. Under current
regulations, retrofitting will enable a vessel to operate until the earlier of
25 years of age and the anniversary date of its delivery in 2017. However, as a
result of the oil spill in November 2002 relating to the loss of the m.t.
Prestige, which was owned by a company not affiliated with us, in December 2003
the Marine Environmental Protection Committee of the IMO adopted a proposed
amendment to the International Convention for the Prevention of Pollution from
Ships to accelerate the phase out of single hull tankers from 2015 to 2010
unless the relevant flag states extend the date to 2015. This proposed amendment
will come into effect in April 2005 unless objected to by a sufficient number of
member states. We do not know whether any of our vessels will be subject to this
accelerated phase-out, but this could result in a number of our vessels being
unable to trade in many markets after 2010. Moreover, the IMO may still adopt
regulations in the future that could adversely affect the remaining useful lives
of our single hull tankers as well as our ability to generate income from them.
The IMO has also negotiated international conventions that impose liability
for oil pollution in international waters and a signatory's territorial waters.
In September 1997, the IMO adopted Annex VI to the International Convention for
the Prevention of Pollution from Ships to address air pollution from ships.
Annex VI is expected to be ratified by the end of 2003, and will become
effective 12 months after ratification. Annex VI, when it becomes effective,
will set limits on sulfur oxide and nitrogen oxide emissions from ship exhausts
and prohibit deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. Frontline Management is formulating a plan to
comply with the Annex VI regulations once they come into effect. Compliance with
these regulations could require the installation of expensive emission control
systems and could have an adverse financial impact on the operation of our
vessels. Additional or new conventions, laws and regulations may be adopted that
could adversely affect Frontline Management's ability to manage our ships.
Under the International Safety Management Code, or ISM Code, promulgated by
the IMO the party with operational control of a vessel is required to develop an
extensive safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and describing
procedures for responding to emergencies. Frontline Management will rely upon
the safety management system that Frontline and its third party technical
managers have developed.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with code requirements for a safety management system.
No vessel can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state, under the ISM Code. We have
the requisite documents of compliance for our offices and safety management
certificates for all of our tankers for which the certificates are required by
the IMO. Frontline Management is required to renew these documents of compliance
and safety management certificates annually.
Noncompliance with the ISM Code and other IMO regulations may subject the
shipowner or bareboat charterer to increased liability, may lead to decreases in
available insurance coverage for affected vessels and may result in the denial
of access to, or detention in, some ports. For example, the U.S. Coast Guard and
European Union authorities have indicated that vessels not in compliance with
the ISM Code will be prohibited from trading in U.S. and European Union ports.
Although the United States is not a party to these conventions, many
countries have ratified and follow the liability plan adopted by the IMO and set
out in the International Convention on Civil Liability for Oil Pollution Damage
of 1969. Under this convention and depending on whether the country in which the
damage results is a party to the 1992 Protocol to the International Convention
on Civil Liability for Oil Pollution Damage, a vessel's registered owner is
strictly liable for pollution damage caused in the territorial waters of a
contracting state by discharge of persistent oil, subject to certain complete
defenses. Under an amendment to the Protocol that became effective on November
1, 2003, for vessels of 5,000 to 140,000 gross tons (a unit of measurement for
the total enclosed spaces within a vessel), liability will be limited to
approximately $6.5 million plus $907 for each additional gross ton over 5,000.
For vessels of over 140,000 gross tons, liability will be limited to
approximately $122.5 million. The current maximum amount under the 1992 protocol
is approximately $86.98 million. As the convention calculates liability in terms
of a basket of currencies, these figures are based on currency exchange rates on
April 14, 2004. The right to limit liability is forfeited under the
International Convention on Civil Liability for Oil Pollution Damage where the
spill is caused by the owner's actual fault and under the 1992 Protocol where
the spill is caused by the owner's intentional or reckless conduct. Vessels
trading to states that are parties to these conventions must provide evidence of
insurance covering the liability of the owner. In jurisdictions where the
International Convention on Civil Liability for Oil Pollution Damage has not
been adopted, various legislative schemes or common law govern, and liability is
imposed either on the basis of fault or in a manner similar to that convention.
We believe that our P&I insurance will cover the liability under the plan
adopted by the IMO.
U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response,
Compensation and Liability Act
The United States regulates the tanker industry with an extensive
regulatory and liability regime for environmental protection and cleanup of oil
spills, consisting primarily of the U.S. Oil Pollution Act of 1990, or OPA, and
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA. OPA affects all owners and operators whose vessels trade with the United
States or its territories or possessions, or whose vessels operate in the waters
of the United States, which include the U.S. territorial sea and the 200
nautical mile exclusive economic zone around the United States. CERCLA applies
to the discharge of hazardous substances (other than oil) whether on land or at
sea. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are
"responsible parties" who are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from oil spills from their vessels. These other damages are defined broadly to
include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings
capacity;
o net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $1,200
per gross ton or $10 million per tanker that is over 3,000 gross tons (subject
to possible adjustment for inflation). The act specifically permits individual
states to impose their own liability regimes with regard to oil pollution
incidents occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for discharge of pollutants within
their waters. In some cases, states that have enacted this type of legislation
have not yet issued implementing regulations defining tanker owners'
responsibilities under these laws. CERCLA, which applies to owners and operators
of vessels, contains a similar liability regime and provides for cleanup,
removal and natural resource damages. Liability under CERCLA is limited to the
greater of $300 per gross ton or $5 million.
These limits of liability do not apply, however, where the incident is
caused by violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or willful
misconduct. These limits do not apply if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law.
OPA also requires owners and operators of vessels to establish and maintain
with the U.S. Coast Guard evidence of financial responsibility sufficient to
meet the limit of their potential strict liability under the act. The U.S. Coast
Guard has enacted regulations requiring evidence of financial responsibility in
the amount of $1,500 per gross ton for tankers, coupling the OPA limitation on
liability of $1,200 per gross ton with the CERCLA liability limit of $300 per
gross ton. Under the regulations, evidence of financial responsibility may be
demonstrated by insurance, surety bond, self-insurance or guaranty. Under OPA
regulations, an owner or operator of more than one tanker is required to
demonstrate evidence of financial responsibility for the entire fleet in an
amount equal only to the financial responsibility requirement of the tanker
having the greatest maximum strict liability under OPA and CERCLA. Frontline
Management has provided requisite guarantees and received certificates of
financial responsibility from the U.S. Coast Guard for each of our tankers
required to have one.
Frontline Management has insured each of our tankers with pollution
liability insurance in the maximum commercially available amount of $1.0
billion. However, a catastrophic spill could exceed the insurance coverage
available, in which event there could be a material adverse effect on our
business, on the Charterer's business, which could impair the Charterer's
ability to make payments to us under our charters, and on Frontline Management's
business, which could impair Frontline Management's ability to manage our
vessels.
Under OPA, oil tankers without double hulls will not be permitted to come
to U.S. ports or trade in U.S. waters by 2015. Based on the current phase-out
requirement, our 15 single hull tankers will not be eligible to carry oil as
cargo within the 200-mile United States exclusive economic zone starting in
2010, except that these tankers and our three double sided tankers may trade in
U.S. waters until 2015 if their operations are limited to discharging their
cargoes at the LOOP or off-loading by lightering within authorized lightering
zones more than 60 miles off-shore.
OPA also amended the Federal Water Pollution Control Act to require owners
or operators of tankers operating in the waters of the United States must file
vessel response plans with the U.S. Coast Guard, and their tankers are required
to operate in compliance with their U.S. Coast Guard approved plans. These
response plans must, among other things:
o address a "worst case" scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources to respond to a "worst case
discharge";
o describe crew training and drills; and
o identify a qualified individual with full authority to implement
removal actions.
Vessel response plans for our tankers operating in the waters of the United
States have been approved by the U.S. Coast Guard. In addition, the U.S. Coast
Guard has announced it intends to propose similar regulations requiring certain
vessels to prepare response plans for the release of hazardous substances.
Frontline Management is responsible for ensuring our vessels comply with any
additional regulations.
OPA does not prevent individual states from imposing their own liability
regimes with respect to oil pollution incidents occurring within their
boundaries. In fact, most U.S. states that border a navigable waterway have
enacted environmental pollution laws that impose strict liability on a person
for removal costs and damages resulting from a discharge of oil or a release of
a hazardous substance. These laws may be more stringent than U.S. federal law.
European Union Tanker Restrictions
In July 2003, in response to the m.t. Prestige oil spill in November 2002,
the European Union adopted legislation that prohibits all single hull tankers
from entering into its ports or offshore terminals by 2010. The European Union
has also banned all single hull tankers carrying heavy grades of oil from
entering or leaving its ports or offshore terminals or anchoring in areas under
its jurisdiction. Commencing in 2005, certain single hull tankers above 15 years
of age will also be restricted from entering or leaving European Union ports or
offshore terminals and anchoring in areas under European Union jurisdiction. The
European Union is also considering legislation that would: (1) ban manifestly
sub-standard vessels (defined as those over 15 years old that have been detained
by port authorities at least twice in a six month period) from European waters
and create an obligation of port states to inspect vessels posing a high risk to
maritime safety or the marine environment; and (2) provide the European Union
with greater authority and control over classification societies, including the
ability to seek to suspend or revoke the authority of negligent societies. The
sinking of the m.t. Prestige and resulting oil spill in November 2002 has lead
to the adoption of other environmental regulations by certain European Union
nations, which could adversely affect the remaining useful lives of all of our
tankers and our ability to generate income from them. For example, Italy
announced a ban of single hull crude oil tankers over 5,000 dwt. from most
Italian ports, effective April 2001. Spain has announced a similar prohibition.
It is impossible to predict what legislation or additional regulations, if any,
may be promulgated by the European Union or any other country or authority.
There are 18 tankers in our total fleet that are not double hull and that
will begin to be phased out beginning in 2010 under regulations imposed under
OPA, the IMO and the European Union.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002 (MTSA) came into effect.
To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to the International Convention
for the Safety of Life at Sea (SOLAS) created a new chapter of the convention
dealing specifically with maritime security. The new chapter is scheduled to go
into effect in July 2004 and will impose various detailed security obligations
on vessels and port authorities, most of which are contained in the newly
created International Ship and Port Facilities Security (ISPS) Code. Among the
various requirements are:
o on-board installation of automatic information systems, or AIS,
to enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international
maritime security standards, exempt non-U.S. tankers from MTSA vessel security
measures provided such vessels have on board, by July 1, 2004, a valid
International Ship Security Certificate (ISSC) that attests to the vessel's
compliance with SOLAS security requirements and the ISPS Code. Frontline
Management will implement the various security measures addressed by the MTSA,
SOLAS and the ISPS Code and ensure that our tankers attain compliance with all
applicable security requirements within the prescribed time periods. We do not
believe these additional requirements will have a material financial impact on
our operations.
Legal Proceedings
Our shipowning subsidiaries are routinely party, as plaintiff or defendant,
to claims and lawsuits in various jurisdictions for demurrage, damages, off hire
and other claims and commercial disputes arising from the operation of their
vessels, in the ordinary course of business or in connection with its
acquisition activities. We believe that resolution of such claims will not have
a material adverse effect on our operations or financial conditions.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors and certain key officers of Frontline Management AS, which is a
wholly owned subsidiary of Frontline, who are responsible for overseeing the
management of our vessels. With the exception of Paul Leand who is independent,
all of our current executive officers and directors are officers and/or
directors of Frontline, Frontline Management and the Charterer.
Name Age Position
---- --- --------
Tor Olav Tr0im 41 Chairman of the Board,
Chief Executive Officer,
President and Director of
the Company
Tom E. Jebsen 46 Chief Financial Officer and
Vice President of the
Company
Kate Blankenship 39 Chief Accounting Officer,
Company Secretary and
Director of the Company
Paul Leand 37 Director of the Company
Oscar Spieler 42 Chief Executive Officer of
Frontline Management AS
Under our constituent documents, we are required to have at least one
independent director on our board of directors whose consent will be required to
file for bankruptcy, liquidate or dissolve, merge or sell all or substantially
all of our assets. We are also required, among other things, to maintain our
corporate separateness from our affiliates, to maintain books, records and
accounts separate from any other entities, to observe all corporate formalities
and not to co-mingle our assets with any other entity.
Certain biographical information about each of the directors and executive
officers of the Company is set forth below.
Tor Olav Tr0im is the Chairman of the Board, Chief Executive Officer,
President and a Director of the Company. He has been Vice-President and a
director of Frontline since November 3, 1997. He previously served as Deputy
Chairman of Frontline from July 4, 1997. Mr. Tr0m also serves as a consultant to
Seatankers Management Co. Ltd. and since May 2000, has been a director and
Vice-Chairman of Knightsbridge Tankers Limited ("Knightsbridge"). He is a
director of Aktiv Inkasso ASA and Northern Oil ASA, both Norwegian Oslo Stock
Exchange listed companies. Prior to his service with Frontline, from January
1992, Mr. Tr0im served as Managing Director and a member of the Board of
Directors of DNO AS, a Norwegian oil company. Mr. Tr0im has served as a director
of Golar LNG Limited since May 2001.
Tom E. Jebsen is the Chief Financial Officer and Vice President of the
Company. Mr. Jebsen has served as Chief Financial Officer of Frontline since
June 1997. From December 1995 until June 1997, Mr. Jebsen served as Chief
Financial Officer of Tschudi & Eitzen Shipping ASA, a publicly traded Norwegian
shipowning company. From 1991 to December 1995, Mr. Jebsen served as Vice
President of Dyno Industrier ASA, a publicly traded Norwegian explosives
producer. Mr. Jebsen is also a director of Assuranceforeningen Skuld and Hugin
ASA, an internet company.
Kate Blankenship is Chief Accounting Officer, Company Secretary and a
Director of the Company. Mrs. Blankenship joined Frontline in 1994. She is Chief
Accounting Officer and Company Secretary of Frontline and has been a director of
Frontline since 2003. Prior to joining Frontline, she was a Manager with KPMG
Peat Marwick in Bermuda. She is a member of the Institute of Chartered
Accountants in England and Wales. Mrs. Blankenship has been Chief Financial
Officer of Knightsbridge since April 2000 and Secretary of Knightsbridge since
December 2000. Mrs. Blankenship has been a director of Golar LNG Limited since
2003.
Paul Leand Jr., who is not affiliated with Frontline, serves a Director of
the Company. Mr. Leand is the Chief Executive Officer and Director of American
Marine Advisors, Inc., or AMA, an investment bank specializing in the maritime
industry. From 1989 to 1998 Mr. Leand served at the First National Bank of
Maryland where he managed the Bank's Railroad Division and its International
Maritime Division. He has worked extensively in the U.S. capital markets in
connection with AMA's restructuring and mergers and acquisitions practices. Mr.
Leand serves as a member of American Marine Credit LLC's Credit Committee and
served as a member of the Investment Committee of AMA Shipping Fund I, a private
equity fund formed and managed by AMA.
Oscar Spieler has served as Chief Executive Officer of Frontline Management
AS since October 2003, and prior to that time as Technical Director of Frontline
Management AS since November 1999. From 1995 until 1999, Mr. Spieler served as
Fleet Manager for Bergesen, a major Norwegian gas tanker and VLCC owner. From
1986 to 1995, Mr. Spieler worked with the Norwegian classification society DNV,
working both with shipping and offshore assets.
COMPENSATION INFORMATION
With the exception of Mr. Leand, the Company does not currently compensate
its directors and officers for their services to the Company. Mr. Leand receives
an annual fee of $40,000. We do reimburse directors for reasonable out of pocket
expenses incurred by them in connection with their service to the Company. The
Company does not currently have any board committees.
SECURITY OWNERSHIP OF CERTAIN SHAREHOLDERS AND MANAGEMENT
As of August, 2004, a total of 75,525,837 of our common shares were
outstanding, of which 73 percent was held by Frontline.
The beneficial interests of our Directors and officers in the common shares
of the Company as of August 31, 2004, were as follows:
Percentage of
Common Shares Common Shares
Director or Officer of $1.00 each Outstanding
Tor Olav Troim 25,873 *
Paul Leand - -
Kate Blankenship 2,500 *
Tom E. Jebsen 9,889 *
Oscar Spieler 4,500 *
* Less than one per cent
The Company does not have a share option plan and none of the Company's
Directors and officers hold any options to acquire common shares of the Company.
The following table presents certain information regarding the current
ownership of the common shares with respect to (i) each person who is known by
the Company to own more than five per cent of the Company's outstanding common
shares; and (ii) all directors and officers as a group as of August 31, 2004.
Ordinary Shares
Owner Amount Per cent
Frontline Ltd 55,444,370 73%
Hemen Holding Ltd 12,277,669 16.3%
All Directors and Officers as a group (five persons) 61,791 *
*Less than one percent
The Company's major shareholders have the same voting rights as other
shareholders of the Company.
RELATED PARTY TRANSACTIONS
We were formed as a wholly owned subsidiary of Frontline in October 2003
and commenced operations in January 2004. We acquired the majority of our
assets, which consist primarily of our fleet of 46 vessels and an option to
acquire one additional vessel, from Frontline. The majority of our operations
are conducted through contractual relationships between us and other affiliates
of Frontline. In addition, the majority of our directors are also directors of
Frontline. We do not have a corporate policy regarding related party
transactions, nor are there any provisions in our Memorandum of Association or
bye-laws regarding related party transactions. Our Bye-laws, as permitted by the
Bermuda Companies Act of 1981, provides that we, or one of our subsidiaries, may
enter into a contract with on or our directors or officers, or an entity in
which a director or an officer has a material interest, if the director or
officer discloses its interest to our Board of Directors.
Frontline Ltd.-Fleet Purchase Agreement. We acquired our fleet of 46 vessel
owning subsidiaries and one subsidiary with an option to acquire an additional
vessel from Frontline pursuant to a fleet purchase agreement between us and
Frontline that we entered into in December 2003 for an aggregate purchase price
of $950 million. We also assumed senior secured indebtedness with respect to our
fleet in the amount of approximately $1.158 billion, which we subsequently
refinanced with the proceeds of our notes, our $1,058 billion credit facility
and a deemed equity contribution from Frontline. The fleet purchase agreement
provides that the charters and the management agreements were each given
economic effect as of January 1, 2004.
Frontline Shipping Limited-Charters. We have chartered our fleet of vessels to
the Charterer under long term time charters, which extend for periods ranging
from approximately seven to 23 years. We expect that the Charterer will, in
turn, charter our vessels to third parties. The daily base charter rates payable
to us under the charters have been fixed in advance and will decrease as our
vessels age, and the Charterer has the right to terminate a charter for a non
double hull vessel after 2010. The daily charter rate that the Charterer will
pay to us is not dependant on the revenue that the Charter receives from
chartering our vessels to third parties. The Charterer is not obligated to pay
us charterhire for off hire days in excess of five off hire days per year per
vessel, calculated on a fleet-wide basis. However, under the vessel management
agreements, Frontline Management will reimburse us for any loss of charter
revenue in excess of five off hire days per vessel, calculated on a fleet-wide
basis.
Frontline Ltd. and Frontline Shipping Limited-Charter Ancillary Agreement. We
and our vessel owning subsidiaries have entered into a charter ancillary
agreement with Frontline and Frontline Shipping Limited which provides, among
other things, for:
o the maintenance of the charter service reserve by the Charterer,
o profit sharing payments by the Charterer to us when charter
revenues for our fleet exceed a weighted average rate of $25,575
per day for each VLCC and $21,100 per day for each Suezmax
tanker, and
o the deferral of charter payments to us by the Charterer during
any period when cash and cash equivalents held by the Charterer
fall below a predetermined amount. The charter ancillary
agreement also imposes certain restrictive covenants on the
Charter, including, among others, a covenant not to pay dividends
or make other distributions to its shareholders, incur additional
indebtedness, loan, repay or make any other payment in respect of
its indebtedness, undertake some corporate transactions, or amend
its charter, unless, in each case, certain conditions are met.
The Charterer's obligations to us under the charters and the charter
ancillary agreement are secured by a lien over its assets and a pledge of the
equity interests in the Charterer. In addition, Frontline has guaranteed the
Charterer's obligations under the charter ancillary agreement pursuant to the
performance guarantee. Subject to a 30-day cure period, and in addition to any
other available rights or remedies we may have, upon the occurrence of any event
of default under the charter ancillary agreement we may terminate any or all of
the charters and foreclose on any or all of our security interests provided by
the agreement.
Frontline Management-Vessel Management Agreements. Each of our vessel owning
subsidiaries has entered into fixed rate vessel management agreements with
Frontline Management, pursuant to which Frontline Management is responsible for
the technical management of their respective vessels. We expect that Frontline
Management will outsource many of these services to third party providers. The
management agreements also require Frontline Management to maintain insurance
for each of the vessels. Under the management agreements, each of our vessel
owning subsidiary pays Frontline Management a fixed fee of $6,500 per day per
vessel for as long as the relevant charter is in place.
Frontline Management-Administrative Services Agreement. We and each of our
vessel owning subsidiaries have entered into an administrative services
agreement with Frontline Management. Under the terms of the agreement, Frontline
Management provides us and our vessel owning subsidiaries with all of our
non-vessel related administrative support services and with office space in
Bermuda. We and our vessel owning subsidiaries each pay Frontline Management a
fixed fee of $20,000 per year for its services under the agreement, and will
reimburse Frontline Management for reasonable third party costs that it incurs
on our behalf.
Frontline Ltd.-Performance Guarantee. Frontline has issued a performance
guarantee with respect to the charters, the management agreements, the
administrative services agreement, and the charter ancillary agreement. Under
the terms of this guarantee, Frontline has guaranteed:
o the Charterer's performance of its obligations under the charters
other than the payment of charter hire,
o the Charterer's performance of its obligations under the charter
ancillary agreement,
o Frontline Management's performance of its obligations under the
management agreements (however, Frontline "s indemnification
obligation for environmental matters will not exceed the coverage
of the applicable protection and indemnity insurance), and
o Frontline Management's obligations under the administrative
services agreement.
The performance guarantee will remain in effect until all of the
obligations of the Charterer and Frontline Management that are guaranteed under
the performance guarantee have been performed.
SELLING SHAREHOLDERS
Based solely upon information furnished to us, the following table sets
forth information about the selling shareholders. Although the selling
shareholders may offer for sale from time to time all or a portion of the shares
pursuant to this prospectus, or an amendment or supplement thereto, the tabular
information below assumes that all of the shares registered will be offered and
sold by the selling shareholders. In addition, the selling shareholders
identified in the table may have sold, transferred or otherwise disposed of all
or a portion of their shares since the date on which they provided us with
information regarding their shares in transactions exempt from the registration
requirements of the Securities Act. Information concerning the selling
shareholders may change from time to time and, to the extent required, will be
set forth in supplements or amendments to this prospectus.
[Enlarge/Download Table]
Shares owned prior to Shares owned
Selling Shareholder Shares offered for Sale offering after offering
------------------------------------------------------------- ----------------------------- --------------
Passport Master Fund, LP 899,360 Common Shares; 899,360 Common Shares; -0-
c/o Passport Management, LLC representing 1.190% of all representing 1.190% of all
402 Jackson St. issued and outstanding common issued and outstanding common
San Francisco, CA 94111 shares shares
Passport Master Fund II, LP 700,640 Common Shares; 700,640 Common Shares; -0-
c/o Passport Management, LLC representing 0.927% of all representing 0.927% of all
402 Jackson St. issued and outstanding common issued and outstanding common
San Francisco, CA 94111 shares shares
DESCRIPTION OF CAPITAL STOCK
Under our Amended Memorandum of Association, our authorized capital
consists of 125,000,000 common shares having a par value of $1.00 each, of which
75,525,837 are issued and outstanding.
We were formed in October of 2003 with an authorized share capital of
$12,000, divided into shares of $1.00 each. In connection with our partial
spin-off from Frontline in June 2004, our authorized share capital was increased
to 125,000,000 shares, each having a par value of $1.00, of which 73,925,837
were issued and outstanding immediately after the partial spin-off. In July
2004, we issued 1,600,000 common shares to the selling shareholders for the
price of $15.75 per share. Immediately following our issues of these shares our
total outstanding shares were 75,525,837.
The purposes and powers of the Company are set forth in Items 6(1) and 7(a)
through (h) of our Memorandum of Association and in the Second Schedule of the
Bermuda Companies Act of 1981 which is attached as an exhibit to our Memorandum
of Association. These purposes include exploring, drilling, moving, transporting
and refining petroleum and hydro-carbon products, including oil and oil
products; the acquisition, ownership, chartering, selling, management and
operation of ships and aircraft; the entering into of any guarantee, contract,
indemnity or suretyship and to assure, support, secure, with or without the
consideration or benefit, the performance of any obligations of any person or
persons; and the borrowing and raising of money in any currency or currencies to
secure or discharge any debt or obligation in any manner.
Bermuda law permits the Bye-laws of a Bermuda company to contain a
provision eliminating personal liability of a director or officer to the company
for any loss arising or liability attaching to him by virtue of any rule of law
in respect of any negligence default, breach of duty or breach of trust of which
the officer or person may be guilty. Bermuda law also grants companies the power
generally to indemnify directors and officers of the company if any such person
was or is a party or threatened to be made a party to a threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is or
was a director and officer of the company or was serving in a similar capacity
for another entity at the company's request.
Special rights attaching to any class of our shares may be altered or
abrogated with the consent in writing of not less than 75% of the issued and
shares of that class or with the sanction of a resolution passed at a separate
general meeting of the holders of such shares voting in person or by proxy.
Our Bye-laws do not prohibit a director from being a party to, or otherwise
having an interest in, any transaction or arrangement with the Company or in
which the Company is otherwise interested. Our Bye-laws provide our board of
directors the authorituy to exercise all of the powers of the Company to borrow
money and to mortgage or charge all or any part of our property and assets as
collateral securityt fgor any debt, liability or obligation. Our directors are
not required to retire because of their age, and our directors are not required
to be holders of our common shares. Directors serve for one year terms, and
shall serve until re-elected or until their successors are appointed at the next
annual general meeting.
Our Bye-laws provide that no director, alternate director, officer, person
or member of a committee, if any, resident representative, or his heirs,
executors or administrators, which we refer to collectively as an indemnitee, is
liable for the acts, receipts, neglects, or defaults of any other such person or
any person involved in our formation, or for any loss or expense incurred by us
through the insufficiency or deficiency of title to any property acquired by us,
or for the insufficiency of deficiency of any security in or upon which any of
our monies shall be invested, or for any loss or damage arising from the
bankruptcy, insolvency, or tortuous act of any person with whom any monies,
securities, or effects shall be deposited, or for any loss occasioned by any
error of judgment, omission, default, or oversight on his part, or for any other
loss, damage or misfortune whatever which shall happen in relation to the
execution of his duties, or supposed duties, to us or otherwise in relation
thereto. Each indemnitee will be indemnified and held harmless out of our funds
to the fullest extent permitted by Bermuda law against all liabilities, loss,
damage or expense (including but not limited to liabilities under contract, tort
and statute or any applicable foreign law or regulation and all reasonable legal
and other costs and expenses properly payable) incurred or suffered by him as
such director, alternate director, officer, person or committee member or
resident representative (or in his reasonable belief that he is acting as any of
the above). In addition, each indemnitee shall be indemnified against all
liabilities incurred in defending any proceedings, whether civil or criminal, in
which judgment is given in such indemnitee's favor, or in which he is acquitted.
We are authorized to purchase insurance to cover any liability it may incur
under the indemnification provisions of its Bye-laws.
DESCRIPTION OF INDEBTEDNESS
Credit Facility
We have entered into a $1.058 billion senior term loan secured facility
with a syndicate of lenders led by Citigroup Global Markets Limited and Nordea
Bank Norge ASA. The facility is for a term of term of six years. The proceeds
from the facility were used in part to fund the acquisition of our fleet from
Frontline and to refinance existing debt on all of our vessels. Our obligations
under the loan facility are secured by all of our assets, including our vessels,
the equity interests of our vessel owning subsidiaries and our interest in the
Charterer's assets. In addition, each of our vessel owning subsidiaries has
guaranteed our performance under the loans.
The loan facility bears interest at the LIBOR rate plus 1.25% per year and
may be prepaid on a pro-rata basis without penalty. As required under the terms
of the facility, we have entered into an interest rate swap to fix the interest
on at least $500.0 million of the borrowings under the facility for a period of
at least five years.
The principal amortization schedule in respect of the loan facility is
follows:
Year Amount(dollars in millions)
---- ---------------------------
2004 $93.7
2005 93.7
2006 93.7
2007 93.7
2008 93.7
2009 89.8
At maturity in 2010 499.7
The loan facility subjects us to number of restrictions on our business and
financial maintenance covenants, including restrictions on creating liens on the
vessels, limitations on our ability to amend our charters, management and
administrative agreements, minimum liquidity and working capital requirements,
and collateral maintenance limitations. Under the loan facility, we may incur
additional indebtedness to fund acquisitions of additional vessels, provided
that the additional indebtedness incurred does not exceed 70% of value of the
vessel. The loan facility also restricts us from issuing any guarantees other
than guarantees issued in connection with our ordinary course of commercial
activities, or as contemplated in the loan facility or the note indenture.
Further, the loan facility restricts our ability to make distributions unless
(i) the charter service reserve and our available working capital exceed, in the
aggregate, $100 million and (ii) we satisfy financial covenants contained in the
loan facility relating to minimum liquidity, working capital and equity to debt
ratios as of the date of the distribution.
8.5% Senior Notes due 2013
We issued $580 million in principal amount of senior notes, due 2013, on
December 18, 2003 in a private placement pursuant to Rule 144A and Regulation S
under the Securities Act of 1933, as amended. We commenced an exchange offer for
the notes on May 25, 2004 pursuant to which we offered to exchange these notes
for identical notes, or exchange notes, that are registered under the 1933 Act.
The expiration date of the exchange offer was July 26, 2004, and as of the
expiration date 100% of the outstanding notes had been tendered for exchange. We
have repurchased $25 million face value of the notes, which were subsequently
cancelled. The exchange notes are registered under the Securities Act of 1933
pursuant to a registration statement filed on Form F-4 filed with the U.S.
Securities and Exchange Commission.
The notes are issued under an Indenture dated as of December 18, 2003,
among us, our subsidiaries and Wilmington Trust Company, as trustee. The notes
are our general unsecured, senior obligations. They will be limited initially to
an aggregate principal amount of $580 million and will mature on December 15,
2013. The notes rank equally in right of payment to any of our future senior
Indebtedness, but will be effectively subordinated to all of our present and
future secured Indebtedness, to the extent of the value of the collateral
securing such Indebtedness. The notes are unconditionally guaranteed on a senior
unsecured basis by each of our subsidiaries, but the guarantees will be
effectively subordinated to all present and future secured indebtedness of our
subsidiaries, to the extent of the value of the collateral securing such
indebtedness.
Interest on the notes will accrue at the rate of 8.50% per annum beginning
on the date of issuance or the most recent interest payment date. Interest on
the notes will be payable in cash semi-annually in arrears on June 15 and
December 15, and commenced on June 15, 2004.
PLAN OF DISTRIBUTION
We are registering for sale by the selling shareholders from time to time
1,600,000 of our common shares. The selling shareholders may offer and sell,
from time to time, some or all of the common shares covered by this prospectus.
We have registered the common shares covered by this prospectus for offer and
sale by the selling shareholders so that those shares may be freely sold to the
public by them. Registration of the common shares covered by this prospectus
does not mean, however, that those shares necessarily will be offered or sold.
The term "selling shareholder" includes donees, pledgees, assignees,
transferees or other successors-in-interest selling shares received after the
date of this prospectus from a selling shareholder as a gift, pledge,
assignment, partnership distribution or other transfer. The selling shareholders
will act independently of us in making decisions with respect to the timing,
manner and size of each sale. The selling shareholders may sell their common
shares covered by this prospectus from time to time, in one or more
transactions, at market prices prevailing at the time of sale, at prices related
to market prices, at a fixed price or prices subject to change, at varying
prices determined at the time of sale or at negotiated prices, by a variety of
methods including the following:
o on the New York Stock Exchange or any other national securities
exchange or U.S. inter-dealer system of a registered national
securities association on which our common shares may be listed or
quoted at the time of sale;
o in the over-the-counter market;
o in privately negotiated transactions;
o through broker-dealers, who may act as agents or principals;
o through sales "at the market" to or through a market-maker;
o in a block trade in which a broker-dealer will attempt to sell a block
of shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o through one or more underwriters on a firm commitment or best-efforts
basis; - directly to one or more purchasers;
o through agents;
o in options transactions;
o over the internet; or
o in any combination of the above.
In effecting sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Broker-dealer
transactions may include:
o purchases of the common shares by a broker-dealer as principal and
resales of the common shares by the broker-dealer for its account
pursuant to this prospectus;
o ordinary brokerage transactions; or
o transactions in which the broker-dealer solicits purchasers.
In addition, the selling shareholders may sell any shares covered by this
prospectus in private transactions or under Rule 144 under the Securities Act
rather than pursuant to this prospectus.
In connection with the sale of shares covered by this prospectus,
broker-dealers may receive commissions or other compensation from the selling
stockholder in the form of commissions, discounts or concessions. Broker-dealers
may also receive compensation from purchasers of the shares for whom they act as
agents or to whom they sell as principals or both. Compensation as to a
particular broker-dealer may be in excess of customary commissions or in amounts
to be negotiated. In connection with any underwritten offering, underwriters may
receive compensation in the form of discounts, concessions or commissions from
the selling shareholders or from purchasers of the shares for whom they act as
agents. Underwriters may sell the shares to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agents. The selling shareholders and any underwriters, broker-dealers or
agents that participate in the distribution of the common shares may be deemed
to be "underwriters" within the meaning of the Securities Act, and any profit on
the sale of the shares by them and any discounts, commissions or concessions
received by any of those underwriters, broker-dealers or agents may be deemed to
be underwriting discounts and commissions under the Securities Act.
In connection with the distribution of the shares covered by this
prospectus or otherwise, the selling shareholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with such transactions, broker-dealers or other financial institutions may
engage in short sales of our common stock in the course of hedging the positions
they assume with the selling shareholders. The selling shareholders may also
sell shares of our common stock short and deliver the shares offered by this
prospectus to close out its short positions. The selling shareholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus, as supplemented or amended to reflect such transaction. The selling
shareholders also may from time to time pledge their common shares pursuant to
the margin provisions of their customer agreements with their brokers. Upon
default by a selling shareholder, the broker may offer and sell such pledged
common shares from time to time pursuant to this prospectus, as supplemented or
amended to reflect such transaction.
At any time a particular offer of the common shares covered by this
prospectus is made, a revised prospectus or prospectus supplement, if required,
will be distributed which will set forth the aggregate amount of common covered
by this prospectus being offered and the terms of the offering, including the
name or names of any underwriters, dealers, brokers or agents, any discounts,
commissions, concessions and other items constituting compensation from the
selling shareholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. Such prospectus supplement, and, if necessary, a
post-effective amendment to the registration statement of which this prospectus
is a part, will be filed with the SEC to reflect the disclosure of additional
information with respect to the distribution of the common shares covered by
this prospectus. In order to comply with the securities laws of certain states,
if applicable, the shares sold under this prospectus may only be sold through
registered or licensed broker-dealers. In addition, in some states the shares
may not be sold unless they have been registered or qualified for sale in the
applicable state or an exemption from registration or qualification requirements
is available and is complied with. We have informed the selling shareholders
that the anti-manipulative provisions of Regulation M promulgated under the
Exchange Act may apply to their sales of shares in the market and to the
activities of the selling shareholders and their respective affiliates. The
selling shareholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of the shares, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of the shares by
the selling shareholders.
We have agreed to pay all expenses incident to the offering and sale of the
shares covered by this prospectus, other than commissions, discounts and fees of
underwriters, broker-dealers or agents, and have agreed to indemnify the selling
shareholders, their controlling persons and their respective officers,
directors, partners, employees, representatives and agents against certain
losses, claims, damages, actions, expenses and other liabilities arising under
the securities laws in connection with this offering. The selling shareholders
have agreed, severally, to indemnify us, our officers and directors who sign the
registration statement and each of our controlling persons, against any losses,
claims, damages, actions, expenses and other liabilities, arising under the
securities laws in connection with this offering with respect to written
information furnished to us by the selling shareholders for inclusion in the
registration statement of which this prospectus is a part (and up to the amount
of the net proceeds received by the selling shareholder from sales of the shares
giving rise to such obligations).
LEGAL MATTERS
Certain legal matters in connection with the sale of the common shares
offered hereby are being passed upon for the Company by Seward & Kissel LLP, New
York, New York, as to matters of United States and New York law and by Mello,
Jones & Martin as to matters of Bermuda law.
EXPERTS
The predecessor combined carve-out financial statements as of December 31,
2003 and for the year then ended, and the predecessor combined carve-out
financial statements for the year ended December 31, 2001 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers DA Oslo, Norway, an Independent Registered Public
Accountant Firm, given on the authority of said firm as experts in auditing and
accounting. Effective as of July 1, 2004, PricewaterhouseCoopers DA was renamed
PricewaterhouseCoopers AS following a legal restructuring.
The predecessor combined carve-out financial statements as of and for the
year ended December 31, 2002 included in this prospectus have been so included
in reliance on the report of PricewaterhouseCoopers Hamilton, Bermuda, an
Independent Registered Public Accountant Firm, given on the authority of said
firm as experts in auditing and accounting.
The stand alone financial statements of Ship Finance International Limited
as of December 31, 2003 and for the period from October 10, 2003 (Inception) to
December 31, 2003 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers DA Oslo, Norway, an Independent
Registered Public Accountant Firm, given on the authority of said firm as
experts in auditing and accounting.
The section in this prospectus entitled "Industry" has been reviewed by
P.F. Bass0e AS & Co., which has confirmed to us that it accurately describes the
international tanker market, subject to the availability and reliability of the
data supporting the statistical and graphical information presented in this
prospectus, as indicated in the consent of P.F. Bass0e AS & Co. filed as an
exhibit to the registration statement on Form F-1 under the Securities Act of
which this prospectus is a part.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement including exhibits and
schedules thereto on Form F-1 under the Securities Act of 1933 with respect to
the common shares offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all of the information in the
registration statement, as permitted by SEC rules and regulations. For further
information with respect to the Company and the commons shares offered hereby,
reference is made to the registration statement. In addition, we are subject to
the reporting requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934 and file such reports and other information with the SEC. You can
read and copy any materials we file with the SEC at its Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. You can obtain information about
the operation of the SEC's Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a Web site that contains information we
file electronically, which you can access over the internet at
http://www.sec.gov.
You may request a copy of our filings at no cost, by writing or telephoning
us at the following address:
Ship Finance International Limited
Par-la-Ville Place,
14 Par-la-Ville Road
Hamilton, HM 08, Bermuda.
(441) 295-9500
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with any other information. If
anyone provides you with different or inconsistent information, you should not
rely on it.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date on the front cover of this
prospectus.
SHIP FINANCE INTERNATIONAL LIMITED
INDEX TO PREDECESSOR COMBINED CARVE-OUT FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Audited Predecessor Combined Carve-out Statements of
Operations for the years ended December 31, 2003, 2002 and 2001 F-4
Audited Predecessor Combined Carve-out Balance
Sheets as of December 31, 2003 and 2002 F-5
Audited Predecessor Combined Carve-out Statements of Cash
Flows for the years ended December 31, 2003, 2002 and 2001 F-6
Audited Predecessor Combined Carve-out Statements of Changes
in Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001 F-7
Notes to Predecessor Combined Carve-out Financial Statements F-8
F-4
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Ship Finance International Limited.
In our opinion, the accompanying predecessor combined carve-out balance sheet
and the related predecessor combined carve-out statements of operations, cash
flows and changes in stockholder's equity present fairly, in all material
respects, the financial position of the predecessor to Ship Finance
International Limited and its subsidiaries (the Company) at December 31, 2003
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, on January 1, 2002 the
Company adopted Statement of Financial Accounting Standard No. 142.
PricewaterhouseCoopers DA
Oslo, Norway
22 March 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Ship Finance International Limited.
In our opinion, the accompanying predecessor combined carve-out balance sheet
and the related predecessor combined carve-out statements of operations, cash
flows and changes in stockholder's equity present fairly, in all material
respects, the financial position of the predecessor to Ship Finance
International Limited and its subsidiaries (the Company) at December 31, 2002
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, on January 1, 2002 the
Company adopted Statement of Financial Accounting Standard No. 142.
PricewaterhouseCoopers
Hamilton, Bermuda
28 November 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Ship Finance International Limited.
In our opinion, the accompanying predecessor combined carve-out statements of
operations, cash flows and changes in stockholder's equity present fairly, in
all material respects, the results of operations and their cash flows of the
predecessor to Ship Finance International Limited and its subsidiaries (the
Company) for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, on January 1, 2001 the
Company changed its method of accounting for drydocking costs and adopted
Statement of Financial Accounting Standard No. 133.
PricewaterhouseCoopers DA
Oslo, Norway
28 November 2003
SHIP FINANCE INTERNATIONAL LIMITED
Audited Predecessor Combined Carve-out Statements of
Operations for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Operating revenues
Time charter revenues 40,759 10,873 5,804
Bareboat charter revenues 25,986 30,121 27,067
Voyage charter revenues 628,323 324,180 453,784
----------------------------------
Total operating revenues 695,068 365,174 486,655
Operating expenses
Voyage expenses and commission 148,533 93,996 75,199
Ship operating expenses 81,989 81,369 85,105
Depreciation and amortization 106,015 96,773 88,603
Administrative expenses 9,715 6,945 7,030
----------------------------------
Total operating expenses 346,252 279,083 255,937
----------------------------------
Net operating income 348,816 86,091 230,718
Other income (expenses)
Interest income 5,866 8,511 4,346
Interest expense (35,117) (42,126) (58,892)
Share of results of associated companies 22,098 (10,125) 14,259
Foreign currency exchange gain (loss) (10,442) (5,644) 6,246
Other financial items, net 3,591 (4,541) (9,139)
----------------------------------
Net other income (expenses) (14,004) (53,925) (43,180)
----------------------------------
Net income before cumulative effect of
change in accounting principle 334,812 32,166 187,538
----------------------------------
Cumulative effect of change in
accounting principle - (14,142) 24,472
----------------------------------
Net income (loss) 334,812 18,024 212,010
==================================
See accompanying Notes that are an integral part of these Predecessor Combined
Carve-out Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Audited Predecessor Combined Carve-out Balance Sheets as of
December 31, 2003 and 2002
(in thousands of $)
December 31, December 31,
2003 2002
------------------------------
ASSETS
Current Assets
Cash and cash equivalents 26,519 20,634
Trade accounts receivable 23,896 22,993
Other receivables 7,251 6,967
Inventories 16,248 19,949
Voyages in progress 34,916 30,648
Prepaid expenses and accrued income 2,234 1,699
------------------------------
Total current assets 111,064 102,890
------------------------------
Newbuildings and vessel purchase options 8,370 8,370
Vessels and equipment, net 1,863,504 1,904,146
Investment in associated companies 160,082 93,673
Deferred charges 4,304 4,338
Other long term assets 9,024 10,190
Total assets 2,156,348 2,123,607
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt and current
portion of long-term debt 141,522 131,293
Trade accounts payable 4,664 5,215
Accrued expenses 18,729 26,621
Mark to market valuation of derivatives 9,217 16,066
Other current liabilities 10,936 7,237
Amount due to parent company 299,166 476,016
------------------------------
Total current liabilities 484,234 662,448
Long-term liabilities
Long term debt 850,088 975,554
------------------------------
Total liabilities 1,334,322 1,638,002
Commitments and contingencies
Stockholders' equity
Invested equity 822,026 485,605
------------------------------
Total stockholders' equity 822,026 485,605
------------------------------
Total liabilities and
stockholders' equity 2,156,348 2,123,607
==============================
See accompanying Notes that are an integral part of these Predecessor Combined
Carve-out Financial Statements
[Enlarge/Download Table]
SHIP FINANCE INTERNATIONAL LIMITED
Audited Predecessor Combined Carve-out Statements
of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $)
Year ended December 31,
-----------------------
2003 2002 2001
-------- -------- --------
Operating activities
Net income (loss) 334,812 18,024 212,010
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 106,015 96,773 88,603
Amortization of deferred charges 1,019 814 775
Share of results of associated companies (22,098) 10,125 (14,259)
Interest income, capitalized (4,489) (7,077) (638)
Unrealized foreign exchange (gain) loss 10,716 5,334 (6,706)
Change in accounting principle -- 14,142 (24,472)
Adjustment of derivatives to market value (6,850) 2,511 10,996
Release of accumulated other comprehensive
income to net income 1,609 839 --
Changes in operating assets and liabilities,
net of effect of acquisitions:
Trade accounts receivable (343) 6,517 23,292
Other receivables (129) (3,537) 4,817
Inventories 4,540 (10,718) (158)
Voyages in progress (3,061) (23,990) 14,410
Prepaid expenses and accrued income (285) (72) 244
Trade accounts payable (539) 1,115 1,351
Accrued expenses (9,092) 3,899 (2,226)
Other current liabilities 3,698 959 (872)
-------- -------- --------
Net cash provided by operating activities 415,523 115,658 307,167
-------- -------- --------
Investing activities
Additions to newbuildings, vessels and equipment -- (249,291) (210,036)
Investments in associated companies (70,045) (7,490) (65,100)
Proceeds from sales of investments in associated
companies 17,245 -- --
Net maturity (placement) of loans receivable 1,168 (1,085) 3,286
Repayment of other long term liabilities -- (3,913) --
-------- -------- --------
Net cash provided by (used in) investing activities (51,632) (261,779) (271,850)
-------- -------- --------
Financing activities
Amount due to parent company (178,785) 41,424 (59,454)
Proceeds from long term debt -- 228,686 164,600
Repayments of long term debt (178,236) (126,713) (129,208)
Debt fees paid (985) (2,683) (487)
-------- -------- --------
Net cash (used in) provided by financing activities (358,006) 140,714 (24,549)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,885 (5,407) 10,768
Cash and cash equivalents at beginning of period 20,634 26,041 15,273
Cash and cash equivalents at end of period 26,519 20,634 26,041
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest 31,543 43,036 54,963
======== ======== ========
See accompanying Notes that are an integral part of these Predecessor Combined
Carve-out Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Audited Predecessor Combined Carve-out Statements of
Changes in Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001
(in thousands of $)
Invested equity
---------------
Balance at December 31, 2000 259,632
Net income 212,010
Transition adjustment on adoption of SFAS 133 (2,844)
Change in fair values of derivative instruments
accounted for as cash flow hedges (2,056)
Other comprehensive income (loss) (4,900)
Comprehensive income 207,110
Balance at December 31, 2001 466,742
Net income 18,024
Release of accumulated other comprehensive
income to net income 839
Other comprehensive income (loss) 839
Comprehensive income 18,863
Balance at December 31, 2002 485,605
Net income 334,812
Release of accumulated other
comprehensive income to net income 1,609
Other comprehensive income (loss) 1,609
Comprehensive income 336,421
Balance at December 31, 2003 822,026
See accompanying Notes that are an integral part of these Predecessor Combined
Carve-out Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Predecessor Combined Carve-out Financial Statements
1. GENERAL
Ship Finance International Limited (the "Company" or "Ship Finance") was
incorporated in Bermuda on October 10, 2003 for the purpose of acquiring certain
of the shipping assets of its parent company, Frontline Ltd. ("Frontline").
Frontline is a publicly listed Bermuda based shipping company engaged primarily
in the ownership and operation of oil tankers, including oil/bulk/ore ("OBO")
carriers. The Company is a wholly owned subsidiary of Frontline. Frontline
operates tankers of two sizes: very large crude carriers ("VLCCs") which are
between 200,000 and 320,000 deadweight tons ("dwt"), and Suezmaxes, which are
vessels between 120,000 and 170,000 dwt. Frontline is a holding company which
operates through subsidiaries and joint ventures located in Bermuda, Isle of
Man, Liberia, Norway, Panama, Singapore, the Bahamas and Sweden.
These predecessor combined carve-out financial statements have been
prepared to reflect the combination of certain of Frontline's wholly owned VLCC
and Suezmax owning subsidiaries, interests in joint ventures plus a purchase
option to acquire a further VLCC.
These predecessor combined carve-out financial statements have been
prepared in contemplation of a proposed transaction to be entered into between
the Company and Frontline. Pursuant to a fleet purchase agreement executed in
December 2003, effective January 1, 2004, the Company acquired from Frontline
certain of Frontline's wholly owned VLCC and Suezmax owning subsidiaries,
including certain subsidiaries acquired or expected to be acquired through a
reorganization of interests in certain joint ventures plus a purchase option to
acquire a further VLCC (together the "Vessel Interests").
2. ACCOUNTING POLICIES
Basis of accounting
For the years ended December 31, 2003, 2002 and 2001, the predecessor
combined carve-out financial statements presented herein have been carved out of
the consolidated financial statements of Frontline. These predecessor combined
carve-out financial statements include the combined assets, liabilities and
results of operations and cash flows of the corporations listed in Note 4 and
the combined interests in joint ventures listed in Note 11. These predecessor
combined carve-out financial statements for the years ended December 31, 2003,
2002 and 2001 therefore reflect the following:
o the historical book values of the corporations listed in Note 4 and
the interests in associated companies listed in Note 11, held by
Frontline on January 1, 2001; and
o the acquisitions undertaken by Frontline in the three year period
ended December 31, 2003 as described in Note 21. These acquired
corporations have been accounted for at fair value at the date of
acquisition.
The predecessor combined carve-out financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
The predecessor combined carve-out financial statements include the assets and
liabilities of the Company's planned subsidiaries. Investments in companies in
which the Company directly or indirectly holds more than 50 per cent of the
voting control are combined, unless the Company is unable to control the
investee. Subsidiaries acquired have been combined with effect from the
acquisition date.
Investments in companies in which the Company holds between 20 per cent and
50 per cent of an ownership interest, and over which the Company exercises
significant influence, are accounted for using the equity method. The Company
records its investments in equity-method investees on the predecessor combined
carve-out balance sheets as "Investment in associated companies" and its share
of the investees' earning or losses in the predecessor combined carve-out
statements of operations as "Share in results from associated companies". Six
companies in which the Company owns 50.1 per cent have been accounted for using
the equity method as the Company is not able to exercise control. Frontline is a
shipping company with activities that include the ownership and operation of oil
tankers and dry bulk carriers as well as leasing of vessels and participation in
tanker owning joint venture arrangements. Frontline is also involved in the
purchase and sale of vessels. Where Frontline's assets, liabilities, revenues
and expenses relate to the specific Vessel Interests, these have been identified
and carved out for inclusion in these financial statements. Frontline's shipping
interests and other assets, liabilities, revenues and expenses that do not
relate to the Vessel Interests have been identified and not included in these
financial statements. The preparation of the carved out financial statements
requires allocation of certain assets and liabilities and expenses where these
items are not identifiable as related to one specific activity. Administrative
overheads of Frontline that cannot be related to a specific vessel type of
operations have been allocated pro-rata based on the number of vessels in the
Company compared with the number in Frontline's total fleet. Management has
deemed that the related allocations are reasonable to present the financial
position, results of operations, and cash flows of the Company. Management
believes the various allocated amounts would not materially differ from those
that would have been achieved had Ship Finance operated on a stand-alone basis
for all periods presented. However, the financial position, results of
operations and cash flows of the Company are not necessarily indicative of those
that would have been achieved had the Company operated autonomously for all
periods presented as the Company may have made different operational and
investment decisions as a Company independent of Frontline.
The majority of the Company's assets, liabilities, revenues and expenses
are vessel specific and are included in the vessel owning subsidiaries financial
statements. However, in addition, the following significant allocations have
been made:
Goodwill: Goodwill has arisen on certain of the acquisitions undertaken in
the three year period ended December 31, 2003 as described in Note 21. Goodwill
has been allocated to Ship Finance on the basis that the vessels obtained in
these acquisitions, and which the goodwill is considered to relate to, are
included in these predecessor combined carve-out financial statements. The
associated amortization of goodwill has also been allocated to Ship Finance and
recognized in these predecessor combined carve-out financial statements.
Long term debt: An allocation of corporate debt of Frontline has been made
which totals $8,608,000, $9,308,000 and $nil, as of December 31, 2003, December
31, 2002 and 2001, respectively. This debt has been allocated as it relates
specifically to an entity of which the Company has a purchase option. The
associated interest expense has also been allocated to these predecessor
combined carve-out financial statements.
Interest rate swaps: For the purposes of the predecessor combined carve-out
financial statements, interest rate swaps specific to carved out debt have been
included. In addition, non-debt specific interest rate swaps with notional
principal amounts of $50,000,000 have been included on the basis that such swaps
were intended to cover the floating rate debt that has been included in these
predecessor combined carve-out statements. The associated mark to market
adjustments arising on the swaps has also been allocated to these predecessor
combined carve-out financial statements and is included in other financial
items, net.
Administrative expenses: Frontline's overheads relate primarily to
management organizations in Bermuda and Oslo that manage the business. These
overhead costs include salaries and other employee related costs, office rents,
legal and professional fees and other general administrative expenses. Other
employee related costs include costs recognized in relation to Frontline's
employee share option plan. The amount of such costs, presented as part of
administrative expenses, which was allocated from these organizations was
$8,995,000, $5,364,000 and $4,532,000 for the years ended December 31, 2003,
2002 and 2001 respectively.
No allocation of interest income has been made and interest income reported
in the predecessor combined carve-out financial statements represents interest
income earned by the vessel owning subsidiaries and interest earned on loans to
joint ventures.
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates and
assumptions affecting the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
predecessor combined carve-out financial statements do not purport to be
indicative of either the future financial position, results of operations or
cash flows had Ship Finance been a stand-alone entity for the periods presented.
Cash and cash equivalents
For the purposes of the predecessor combined carve-out financial statements
of cash flows, all demand and time deposits and highly liquid, low risk
investments with original maturities of three months or less are considered
equivalent to cash.
Inventories
Inventories, which comprise principally fuel and lubricating oils, are
stated at the lower of cost and market value. Cost is determined on a first-in,
first-out basis.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful lives.
The estimated economic useful life of the Company's double hull vessels is 25
years and for single hull vessels is either 25 years or the vessel's anniversary
date in 2015, whichever comes first.
With effect from April 2001, the International Maritime Organization
implemented new regulations that resulted in the accelerated phase-out of single
hull vessels. As a result of this, the Company re-evaluated the estimated useful
life of its single hull vessels and determined this to be either 25 years or the
vessel's anniversary date in 2017 whichever came first. As a result, the
estimated useful life of five of the Company's vessels was reduced in the fourth
quarter of 2001. A change in accounting estimate was recognized to reflect this
decision, resulting in an increase in depreciation expense and consequently
decreasing net income by $0.3 million for 2001.
In December 2003, the International Maritime Organization adopted new
regulations that will result in a more accelerated phase-out of single hull
vessels. As a result of this, the Company re-evaluated the estimated useful life
of its single hull vessels and determined this to be either 25 years or the
vessel's anniversary date in 2015 whichever came first. As a result, the
estimated useful life of thirteen of the Company's vessels was reduced in the
fourth quarter of 2003. A change in accounting estimate was recognized to
reflect this decision, resulting in an increase in depreciation expense and
consequently decreasing net income by $1.1 million in 2003.
Newbuildings and vessel purchase options
The carrying value of the vessels under construction ("Newbuildings")
represents the accumulated costs to the balance sheet date that the Company has
had to pay by way of purchase installments and other capital expenditures
together with capitalized loan interest and associated finance costs. No charge
for depreciation is made until the vessel is put into operation.
Vessel purchase options are capitalized at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows, which
would result from exercise of each option contract on a contract by contract
basis to determine whether the carrying value of the option is recoverable. If
the expected future cash flows are less than the carrying value of the option
plus further costs to delivery, provision is made to write down the carrying
value of the option to the recoverable amount. The carrying value of each option
payment is written off as and when the Company adopts a formal plan not to
exercise the option. Purchase price payments are capitalized and the total of
the option payment, if any, and purchase price payment is transferred to cost of
vessels, upon exercise of the option and delivery of the vessel to the Company.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate that
the carrying amount of an asset may no longer be appropriate. We assess
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's carrying
value and fair value. In addition, long-lived assets to be disposed of are
reported at the lower of carrying amount and fair value less estimated costs to
sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized
on a straight-line basis over the term of the relevant loan. The straight-line
basis of amortization approximates the effective interest method in the
Company's predecessor combined carve-out statement of operations. Amortization
of loan costs is included in interest expense.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues are
generated from freight billings, contracts of affreightment, time charter and
bareboat charter hires. The operating results of voyages in progress are
estimated and recorded pro-rata on a per day basis in the predecessor combined
carve-out statements of operations. Probable losses on voyages are provided for
in full at the time such losses can be estimated. Time charter and bareboat
charter revenues are recorded over the term of the charter as service is
provided. Amounts receivable or payable arising from profit sharing arrangements
are accrued based on the estimated results of the voyage recorded as at the
reporting date.
In December 1999, Frontline entered into an agreement with five other
shipowners to operate a pool (the "Tankers Pool") of their respective VLCC
fleets. The Tankers Pool commenced operations on February 1, 2000 with an
initial fleet of 39 modern VLCCs. In July 2002, Frontline withdrew from the
Tankers Pool. These predecessor combined carve-out financial statements reflect
the operation of the Tankers Pool for those vessels included in the carve out.
The operating revenues and voyage expenses of the vessels operating in the
Tankers Pool, and certain other pool arrangements, are pooled and net operating
revenues, calculated on a time charter equivalent basis, are allocated to the
pool participants according to an agreed formula. The same revenue and expenses
principles stated above are applied in determining the pool net operating
revenues.
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred.
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings were accrued and charged to expense
on a pro-rata basis over the period to the next scheduled drydockings. Effective
January 1, 2001 the Company recognizes the cost of a drydocking at the time the
drydocking takes place, that is, it applies the "expense as incurred" method.
The expense as incurred method is considered by management to be a more reliable
method of recognizing drydocking costs as it eliminates the uncertainty
associated with estimating the cost and timing of future drydockings. The
cumulative effect of this change in accounting principle is shown separately in
the predecessor combined carve-out statements of operations for the year ended
December 31, 2001 and resulted in a credit to income of $24.5 million in 2001.
The cumulative effect of this change as of January 1, 2001 on the Company's
combined balance sheet was to reduce total liabilities by $24.5 million.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of accumulated amortization and until December
31, 2001 was being amortized over a period of approximately 17 years. As of
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") and recorded an impairment charge of $14.1
million for the unamortised goodwill on that date that is shown separately in
the predecessor combined carve-out statement of operations as a cumulative
effect of change in accounting principle. The valuation of the fair value of the
reporting unit used to assess the recoverability of goodwill was a combination
of independent third party valuations and the quoted market price of the
Company's shares. Supplemental comparative disclosure as if this accounting
change had been retroactively applied is as follows:
(in thousands of $) 2001
------------------- ----
Net income
As reported 212,010
Goodwill amortization 700
Adjusted net income 212,710
Derivatives
The Company enters into interest rate swap transactions from time to time
to hedge a portion of its exposure to floating interest rates. These
transactions involve the conversion of floating rates into fixed rates over the
life of the transactions without an exchange of underlying principal. Hedge
accounting is used to account for these swaps provided certain hedging criteria
are met. As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"). Certain hedge relationships met the hedge criteria
prior to SFAS 133, but do not meet the criteria for hedge accounting under SFAS
133. The Company adopted SFAS 133 in the first quarter of fiscal year 2001 and
upon initial adoption recorded certain transition adjustments resulting in
recognizing the fair value of its derivatives as assets of $0.4 million and
liabilities of $0.7 million. A gain of $0.2 million was recognized in income and
a charge of $0.5 million made to other comprehensive income. On January 1, 2002,
the Company discontinued hedge accounting for two interest rate swaps previously
accounted for as cash flow hedges. This resulted in a balance of $4.9 million
being frozen in accumulated other comprehensive income as at that date and this
will be reclassified to the statement of operations over the life of the
underlying hedged instrument.
Pre-SFAS 133 Adoption
Hedge accounting is applied where the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge with respect to
the hedged item. Additionally, the derivative must result in payoffs that are
expected to be inversely correlated to those of the hedged item. Derivatives are
measured for effectiveness both at inception and on an ongoing basis. When hedge
accounting is applied, the differential between the derivative and the
underlying hedged item is accrued as interest rates change and recognized as an
adjustment to interest expense. The related amount receivable from or payable to
counterparties is included in accrued interest income or expense, respectively.
Prior to January 1, 2001, the fair values of the interest rate swaps are not
recognized in the financial statements.
If a derivative ceases to meet the criteria for hedge accounting, any
subsequent gains and losses are currently recognized in income. If a hedging
instrument is sold or terminated prior to maturity, gains and losses continue to
be deferred until the hedged instrument is recognized in income. Accordingly,
should a swap be terminated while the underlying debt remains outstanding, the
gain or loss is adjusted to the basis of the underlying debt and amortized over
its remaining useful life.
Post-SFAS 133 Adoption
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133" and
SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133", requires an entity to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure these instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. In order to qualify
for hedge accounting under SFAS 133, certain criteria and detailed documentation
requirements must be met.
Financial Instruments
In determining fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives and long term debt, standard market conventions and
techniques such as options pricing models are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of
revenues are received in U.S. dollars and a majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is U.S.
dollars. All of the Company's combined entities report in U.S. dollars.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates of
exchange at the balance sheet date. Foreign currency non-monetary assets and
liabilities are translated using historical rates of exchange. Foreign currency
transaction gains or losses are included in the predecessor combined carve-out
statements of operations.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In December 2003, the FASB issued Interpretation 46
Revised, Consolidation of Variable Interest Entities. In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be combined by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply in the first fiscal year or interim period ending after
December 15, 2003 to variable interest entities created after January 31, 2003.
The consolidation requirements apply in the first fiscal year or interim period
ending after December 15, 2003 for "Special Purpose Entities" created before
January 31, 2003. The consolidation requirements apply in the first fiscal year
or interim period ending after March 15, 2004 for other entities created before
January 31, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established.
The Company has an option to purchase the VLCC Oscilla on or before the
expiry of a five-year time charter, which commenced in March 2000. Oscilla is
owned and operated by an unrelated entity, Seacrest Shipping Ltd. ("Seacrest").
If the Company had exercised its option at December 31, 2003, the cost to the
Company of the Oscilla would have been approximately $42.3 million and the
maximum exposure to loss is $17.4 million, representing amounts outstanding from
Seacrest of $9.0 million and the carrying value of the option of $8.4 million.
At December 31, 2003, Seacrest had total indebtedness of $36.0 million
(including $9.0 million due to the Company) and JPY674.6 million (equivalent to
$6.3 million) and the fair value of the vessel Oscilla was $78.5 million.
4. COMBINED ENTITIES
The Vessel Interests are all owned by separate legal entities. The
following table sets out the details of the significant subsidiaries of
Frontline included in the carved out combined financial statements:
Country of Ownership
Name Vessel Incorporation Percentage
---- ------ ------------- ----------
Granite Shipping Co. Ltd. Front Granite Bahamas 100%
Golden Current Limited Opalia Isle of Man 100%
Bonfield Shipping Ltd. Front Driver Liberia 100%
Fourways Marine Limited Front Spirit Liberia 100%
Front Ardenne Inc. Front Ardenne Liberia 100%
Front Brabant Inc. Front Brabant Liberia 100%
Front Falcon Corp. Front Falcon Liberia 100%
Front Glory Shipping Inc. Front Glory Liberia 100%
Front Pride Shipping Inc. Front Pride Liberia 100%
Front Saga Inc. Front Page Liberia 100%
Front Serenade Inc. Front Serenade Liberia 100%
Front Splendour Shipping Inc. Front Splendour Liberia 100%
Front Stratus Inc. Front Stratus Liberia 100%
Golden Bayshore Shipping Corporation Navix Astral Liberia 100%
Golden Estuary Corporation Front Comanche Liberia 100%
Golden Fjord Corporation Front Commerce Liberia 100%
Golden Seaway Corporation New Vanguard Liberia 100%
Golden Sound Corporation New Vista Liberia 100%
Golden Tide Corporation New Circassia Liberia 100%
Katong Investments Ltd. Front Breaker Liberia 100%
Langkawi Shipping Ltd. Front Birch Liberia 100%
Patrio Shipping Ltd. Front Hunter Liberia 100%
Rakis Maritime S.A. Front Fighter Liberia 100%
Sea Ace Corporation Front Ace Liberia 100%
Sibu Shipping Ltd. Front Maple Liberia 100%
Southwest Tankers Inc. Front Sunda Liberia 100%
West Tankers Inc. Front Comor Liberia 100%
Puerto Reinosa Shipping Co. S.A. Front Lillo Panama 100%
Aspinall Pte Ltd. Front Viewer Singapore 100%
Blizana Pte Ltd. Front Rider Singapore 100%
Bolzano Pte Ltd. Mindanao Singapore 100%
Cirebon Shipping Pte Ltd. Front Vanadis Singapore 100%
Fox Maritime Pte Ltd. Front Sabang Singapore 100%
Front Dua Pte Ltd. Front Duchess Singapore 100%
Front Empat Pte Ltd. Front Highness Singapore 100%
Front Enam Pte Ltd. Front Lord Singapore 100%
Front Lapan Pte Ltd. Front Climber Singapore 100%
Front Lima Pte Ltd. Front Lady Singapore 100%
Front Tiga Pte Ltd. Front Duke Singapore 100%
Front Tujuh Pte Ltd. Front Emperor Singapore 100%
Front Sembilan Pte Ltd. Front Leader Singapore 100%
Rettie Pte Ltd. Front Striver Singapore 100%
Transcorp Pte Ltd. Front Guider Singapore 100%
5. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received written
assurance from the Minister of Finance in Bermuda that, in the event of any such
taxes being imposed, the Company will be exempted from taxation until the year
2016.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S.
counsel, the Company is not engaged in a U.S. trade or business and is exempted
from a gross basis tax under Section 883 of the U.S. Internal Revenue Code.
A reconciliation between the income tax expense resulting from applying the
U.S. Federal statutory income tax rate and the reported income tax expense has
not been presented herein as it would not provide additional useful information
to users of the financial statements as the Company's net income is subject to
neither Bermuda nor U.S. tax.
Other Jurisdictions
Certain of the Company's subsidiaries in Singapore are subject to taxation.
The tax paid by subsidiaries of the Company that are subject to taxation is not
material.
6. LEASES
The minimum future revenues to be received on time charters, bareboat
charters and other contractually committed income as of December 31, 2003 are as
follows:
Yen revenues
------------
Year ending December 31, Dollar
in thousands of (Y) and $) (in (Y)) ($ equivalent) revenues Total
-------------------------- -------- -------------- -------- -----
2004 768,600 7,176 30,722 37,898
2005. 766,500 7,157 30,821 37,977
2006. 766,500 7,157 31,003 38,160
2007. 766,500 7,157 19,790 26,947
2008. 768,600 7,176 8,300 15,476
2009 and later 1,694,700 15,824 - 15,824
------------------------------------------------
Total minimum lease revenues 5,531,400 51,647 120,636 172,283
================================================
The cost and accumulated depreciation of the vessels leased to third
parties at December 31, 2003 and 2002 were as follows:
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Cost 513,470 354,199
Accumulated depreciation 45,044 29,719
7. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $724,000 and $540,000 as of December 31, 2003 and 2002
respectively.
8. OTHER RECEIVABLES
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Agent receivables 2,385 2,781
Other receivables 4,866 4,186
------ ------
7,251 6,967
====== ======
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil as of each of December 31, 2003, 2002 and 2001, respectively.
9. NEWBUILDINGS AND VESSEL PURCHASE OPTIONS
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Newbuildings -- --
Vessel purchase options 8,370 8,370
------ ------
8,370 8,370
====== ======
The carrying value of newbuildings represents the accumulated costs to the
balance sheet date, which the Company has paid by way of purchase installments,
and other capital expenditures together with capitalized loan interest. Interest
capitalized in the cost of newbuildings amounted to $nil, and $936,000 in 2003
and 2002 respectively. The Company took delivery of four newbuildings during
2002.
The Company has an option from a third party to purchase the VLCC Oscilla
on expiry of a five-year time charter, which commenced in March 2000. The
purchase price is equal to the outstanding mortgage debt under four loan
agreements between lenders and the vessel's owning company. As at December 31,
2003 the outstanding mortgage debt of the Oscilla's owning company amounted to
$35,990,067 plus (Y)674,645,262 (equivalent to $6,299,209). (2002--$43,013,215
plus (Y)759,454,316 (equivalent to $6,406,735)). Included in this amount at
December 31, 2003 is debt of $9,023,090 due to the Company (2002--$10,190,000).
The fair value assigned to this option in the purchase accounting for Golden
Ocean was $8,370,000. The fair value was calculated at the time of purchase as
the difference between the fair value of the vessel and the mortgage debt
outstanding.
10. VESSELS AND EQUIPMENT, NET
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Cost 2,607,693 2,542,320
Accumulated depreciation (744,189) (638,174)
----------- -----------
Net book value at end of year 1,863,504 1,904,146
=========== ===========
Depreciation expense was $106.1 million, $96.8 million and $87.9 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
11. INVESTMENT IN ASSOCIATED COMPANIES
At December 31, 2003, the Company has the following participation in
investments that are recorded using the equity method:
Vessel/ Country of Ownership
Name Activity Incorporation Percentage
---- -------- ------------- ----------
Ariake Transport Corporation Ariake Liberia 50.1%
Dundee Navigation SA Dundee Liberia 50.1%
Edinburgh Navigation SA Edinburgh Liberia 50.1%
Hitachi Hull #4983 Corporation Hakata Liberia 50.1%
Sakura Transport Corporation Sakura I Liberia 50.1%
Tokyo Transport Corporation Tanabe Liberia 50.1%
The equity method investees are engaged in the ownership and operation of oil
tankers.
Summarized balance sheet information of the Company's equity method investees is
as follows:
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Current assets 29,617 44,545
Non current assets 387,322 623,538
Current liabilities (106,984) (191,652)
Non current liabilities. (201,347) (470,486)
Summarized statement of operations information of the Company's equity method
investees is as follows:
(in thousands of $) 2003 2002 2001
------------------- ---- ---- ----
Net operating revenues 93,872 61,159 49,207
Net operating income 79,434 17,879 24,612
Net income (loss) 45,039 (19,208) 25,804
In the year ended December 31, 2003, the Company recorded an impairment
charge of $5.2 million related to the other-than-temporary decline in value of
its investments in Golden Lagoon Corporation and Ichiban Transport Corporation.
This impairment charge was triggered by signing agreements on June 25, 2003 for
the sale of our investments for proceeds which were less than book value of
those investments. We disposed of those investments in July 2003 and increased
our investments in Ariake Transport Corporation, Sakura Transport Corporation,
Tokyo Transport Corporation and Hitachi Hull No 4983 Ltd. from 33.33% to 50.10%.
We held 50% of the shares of Golden Tide Corporation during the year ended
December 31, 2002 and the six months ended June 30, 2003. The statement of
operations includes our 50% share of the earnings of Golden Tide Corporation for
the year ended December 31, 2002 and the six months ended June 30, 2003. On June
30, 2003 we acquired the remaining 50% of the shares of this company for $9.5
million and we combined the assets, principally the vessel, amounting to
approximately $65.5 million and liabilities, principally the long-term debt,
amounting to approximately $52.3 million, from that date.
12. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are capitalized and
amortized on a straight-line basis to interest expense over the life of the debt
instrument. The deferred charges are comprised of the following amounts:
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Debt arrangement fees 8,142 7,173
Accumulated amortization (3,838) (2,835)
------- -------
4,304 4,338
======= =======
13. OTHER LONG TERM ASSETS
Other long-term assets represent amounts due to the Company from third
party entities that own the vessel, Oscilla, over which the Company has a
purchase option. (see Note 9).
14. GOODWILL
Goodwill is stated net of related accumulated amortization as follows:
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Goodwill -- 14,142
Accumulated amortization -- (14,142)
------- --------
-- --
======= ========
The Company adopted SFAS 142 effective January 1, 2002 and recorded an
impairment charge of $14.1 million for the unamortised goodwill on that date
(see Note 2). See Note 21 for a description of the business acquisitions that
have resulted in the recording of goodwill in these carved out financial
statements.
15. ACCRUED EXPENSES
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Ship operating and voyage expenses 15,923 22,259
Administrative expenses 152 159
Interest expense 2,654 4,203
-------- --------
18,729 26,621
======== ========
16. AMOUNT DUE TO PARENT COMPANY
The amount due to parent company represents principally intercompany
balances between each of the subsidiaries and Frontline and the effect of the
carve out of the Vessel Interests from Frontline. Frontline operates a
centralized treasury function and the majority of cash earned in subsidiaries is
swept up into Frontline Ltd. and is accounted for through intercompany balances.
16. AMOUNT DUE TO PARENT COMPANY
For the purposes of these predecessor combined carve-out financial
statements no interest expense has been imputed on the amount due to parent
company.
17. DEBT
For the purposes of the predecessor combined carve-out financial statements
for the years ended December 31, 2003 and 2002, two types of debt have been
included:
1. Vessel specific debt included in the subsidiary financial statements.
As of December 31, 2003 and 2002 this was a total of $982,808,000 and
$1,094,727,000 respectively.
2. An allocation of corporate debt of Frontline. As of December 31, 2003
and 2002 this was a total of $8,608,000 and $9,308,000 respectively.
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
US Dollar denominated floating
rate debt (LIBOR + 0.485% to 2.75%)
due through 2011 901,585 1,061,030
Yen denominated floating rate debt
(LIBOR + 1.125% to 1.3135%) due
through 2011 89,830 43,006
Credit facilities 195 2,811
---------- -----------
Total debt 991,610 1,106,847
Less: short term and current
portion of long term debt (141,522) (131,293)
---------- -----------
850,088 975,554
========== ===========
The outstanding debt as of December 31, 2003 is repayable as follows:
(in thousands of $) December 2003
------------------- -------------
2004 141,522
2005 230,993
2006 205,044
2007 111,543
2008 and later 302,508
---------
Total debt 991,610
==========
The weighted average interest rate for the floating rate debt denominated
in US dollars was 3.07 per cent and 3.83 per cent as of December 31, 2003 and
December 31, 2002, respectively. The weighted average interest rate for the
floating rate debt denominated in Yen was 1.32 per cent and 1.37 per cent as of
December 31, 2003 and 2002, respectively. These rates take into consideration
related interest rate swaps.
Substantially all of the debt is collateralised by ship mortgages and, in
the case of some debt, pledges of shares by each guarantor subsidiary. Existing
financing agreements impose operation and financing restrictions which may
significantly limit or prohibit, among other things, the ability to incur
additional indebtedness, create liens, sell capital shares of subsidiaries, make
certain investments, engage in mergers and acquisitions, purchase and sell
vessels, enter into time or consecutive voyage charters or pay dividends without
the consent of our lenders. In addition, the lenders may accelerate the maturity
of indebtedness under our financing agreements and foreclose upon the collateral
securing the indebtedness upon the occurrence of certain events of default,
including failure to comply with any of the covenants contained in our financing
agreements. Various debt agreements contain certain covenants which require
compliance with certain financial ratios. Such ratios include equity ratio
covenants, minimum value clauses, and minimum free cash restrictions. These
covenants are assessed at the parent company. i.e. at Frontline consolidated
level. As of December 31, 2003 and December 31, 2002, Frontline complied with
all the debt covenants of its various debt agreements.
18. SHARE CAPITAL
The Company was incorporated on October 10, 2003 with authorized share
capital of 12,000 ordinary shares of $1.00 par value each. On that date, 12,000
ordinary shares of $1.00 par value each were issued to the initial shareholder,
Frontline Ltd. For the purposes of these predecessor combined carve-out
financial statements, the Company is assumed to have no issued share capital
prior to October 10, 2003.
19. FINANCIAL INSTRUMENTS
Interest rate risk management: In certain situations, the Company may enter
into financial instruments to reduce the risk associated with fluctuations in
interest rates. The Company has a portfolio of swaps that swap floating rate
interest to fixed rate, which from a financial perspective hedge interest rate
exposure. The Company does not hold or issue instruments for speculative or
trading purposes. The counterparties to such contracts are J.P. Morgan Chase,
Nordea Bank Norge, Credit Agricole Indosuez, Deutsche Schiffsbank, Midland Bank
(HSBC), Den norske Bank and Skandinaviska Enskilda Banken. Credit risk exists to
the extent that the counterparties are unable to perform under the contracts.
The Company manages its debt portfolio with interest rate swap agreements
in U.S. dollars to achieve an overall desired position of fixed and floating
interest rates. For the purposes of the carved out combined financial
statements, interest rate swaps specific to carved out debt have been included.
In addition, non debt specific interest rate swaps with notional principal
amounts of $50,000,000 have been included. The Company has entered into the
following interest rate swap transactions involving the payment of fixed rates
in exchange for LIBOR:
Fixed
Inception Maturity Interest
Principal at December 31, 2003 Date Date Rate
------------------------------ ---- ---- ----
(in thousands of $)
$50,000 January 2001 January 2006 5.635%
$49,338 reducing monthly to $29,793 March 1998 March 2006 7.288%
$53,352 reducing monthly to $17,527 September 1998 August 2008 7.490%
Foreign currency risk: The majority of the Company's transactions, assets
and liabilities are denominated in U.S. dollars, the functional currency of the
Company. One of the Company's subsidiaries has Yen denominated long-term debt
which as of December 31, 2003 stood at Yen 9,620,805,000 and a charter contract
denominated in Yen with contracted payments as set forth in Note 6. There is a
risk that currency fluctuations will have a negative effect on the value of the
Company's cashflows. The Company has not entered into derivative contracts for
either transaction or translation risk. Accordingly, such risk may have an
adverse effect on the Company's financial condition and results of operations.
Fair Values The carrying value and estimated fair value of the Company's
financial instruments at December 31, 2003 and 2002 are as follows:
[Enlarge/Download Table]
December 2003 December 2003 December 2002 December 2002
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Non-Derivatives:
Cash and cash equivalents 26,519 26,519 20,634 20,634
Short term debt and current
portion of long term debt 141,522 141,522 131,293 131,293
Long term debt 850,088 850,088 975,554 975,554
Derivatives:
Interest rate swap transactions 5,258 5,258 16,066 16,066
The carrying value of cash and cash equivalents, which are highly liquid,
is a reasonable estimate of fair value.
The estimated fair value for floating rate long-term debt is considered to
be equal to the carrying value since it bears variable interest rates, which are
reset on a quarterly basis.
The fair value of interest rate swaps is estimated by taking into account
the cost of entering into interest rate swaps to offset the Company's
outstanding swaps. Concentrations of risk There is a concentration of credit
risk with respect to cash and cash equivalents to the extent that substantially
all of the amounts are carried with the Bank of America N.A., Skandinaviska
Enskilda Banken, BNP Paribas, Den norske Bank and Nordea Bank Norge. However,
the Company believes this risk is remote as these banks are high credit quality
financial institutions.
The majority of the vessels' gross earnings are receivable in U.S. dollars.
In 2003 and 2002, no customer accounted for 10 per cent or more of freight
revenues.
20. RELATED PARTY TRANSACTIONS
During 1996, 1997 and January 1998, Frontline received options to assume
newbuilding contracts for the construction and purchase of five Suezmax tankers
at the Hyundai Heavy Industries Co. Ltd. shipyard in South Korea for delivery in
1998 and 2000 from single-ship owning companies affiliated with Hemen Holding
Ltd. ("Hemen"). Hemen is Frontline's largest shareholder and is indirectly
controlled by Mr. John Fredriksen, Chairman and Chief Executive Officer of
Frontline and of the Company. Two of the single-ship owning companies, owning
vessels delivered in 1998, have been included in these carved out financial
statements.
In September 2000 Frontline acquired a 1993-built VLCC, which was named
Front Ace from a company affiliated with Hemen. This vessel was acquired for a
price of $53 million which was based on three independent valuations less a $1
million discount compared to appraised market value. The single ship owning
company that owns Front Ace has been included in these predecessor combined
carve-out financial statements.
In February 2001, the Company acquired newbuilding contracts for the
construction and purchase of three VLCC tankers at the Hitachi shipyard in Japan
for delivery in 2002 from Seatankers Management Co. Ltd., a company affiliated
with Hemen. These contracts were acquired for the original contract price of $72
million each plus $0.5 million per contract. These three newbuildings were
delivered in 2002 and are included in these predecessor combined carve-out
financial statements.
21. ACQUISITIONS
ICB Shipping AB (publ)
In September 1997, Frontline made a public offer to acquire all of the
shares of ICB Shipping AB (publ) ("ICB"). Through the tender offer, by October
1997 Frontline acquired 51.7 per cent of the outstanding shares of ICB,
representing 31.4 per cent of the voting rights, at a purchase price of
approximately $215 million. During 1998, Frontline made further purchases of ICB
Shares in the market and at December 31, 1998 had 34.2 per cent of the voting
power. In the latter half of 1999 Frontline increased its shareholding in ICB to
approximately 90 per cent of the capital and 93 per cent of the voting rights.
In October 1999, a new Board of Directors was appointed in ICB and ICB
consequently was controlled by Frontline. In December 1999, Frontline commenced
a compulsory acquisition for the remaining shares in ICB and ICB was delisted
from the Stockholm Stock Exchange. The carved out financial statements of the
Company include all of the VLCC and Suezmax owning subsidiaries acquired by
Frontline and the goodwill arising on the acquisition of ICB.
Golden Ocean Group Limited
On October 10, 2000, Frontline acquired the entire share capital of Golden
Ocean Group Limited ("Golden Ocean"), a shipping group which held interests in
14 VLCCs and 10 bulk carriers. The total acquisition price paid, including
amounts paid to settle allowed claims, was approximately $63.0 million. The
difference between the purchase price and the net assets acquired, has been
recorded as goodwill. The predecessor combined carve-out financial statements of
the Company include seven VLCC owning subsidiaries acquired by Frontline, one
option to acquire a VLCC and one interest in an associated company which owns a
VLCC, and the goodwill arising on this acquisition.
Mosvold Shipping Limited
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares were listed
on the Oslo Stock Exchange. Through a combination of shares acquired and
acceptances of the offer, Frontline acquired 97 per cent of the shares of
Mosvold. The remaining 3 per cent of the shares of Mosvold were acquired during
2001 through a compulsory acquisition. Through the purchase of Mosvold Frontline
acquired two mid-70s built VLCCs and three newbuilding contracts for VLCCs. The
two mid-70s built VLCCs have subsequently been sold by Frontline. The first two
of the newbuildings were delivered in 2002 and the third in July 2003. The total
acquisition price paid for Mosvold was approximately $70.0 million and the
acquisition has been accounted for using the purchase method. The difference
between the purchase price and the net assets acquired, has been assigned to the
identifiable long term assets of Mosvold. Thirty employees of Mosvold were made
redundant as the result of the acquisition by Frontline and severance costs of
approximately $0.3 million were incurred by Mosvold in the year ended December
31, 2001. The predecessor combined carve-out financial statements of the Company
include one newbuilding VLCC owning subsidiary acquired by Frontline.
22. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) December 2003 December 2002
------------------- ------------- -------------
Ship mortgages 1,863,504 1,904,146
Other Contractual Commitments
Frontline insures the legal liability risks for its shipping activities
with Assuranceforeningen SKULD, Assuranceforeningen Gard Gjensidig, Britannia
Steam Ship Insurance Association Limited, and the United Kingdom Mutual
Steamship Assurance Association (Bermuda), all mutual protection and indemnity
associations. As a member of these mutual associations, Frontline is subject to
calls payable to the associations based on the Frontline's claims record in
addition to the claims records of all other members of the associations. A
contingent liability exists to the extent that the claims records of the members
of the associations in the aggregate show significant deterioration, which
result in additional calls on the members.
Certain of Frontline's subsidiaries included in these predecessor combined
carve-out financial statements have contractual rights to participate in the
profits of the vessels New Vanguard and New Vista. Revenues arising from these
arrangements have been accrued to the balance sheet date.
The charterers of two of the vessels included in these carved out combined
financial statements have contractual rights to participate in the profits on
sale of those vessels. If the New Vanguard or New Vista are sold, the charterer
is entitled to claim up to $1 million to cover losses incurred on subcharters of
the vessel. Any remaining profit is to be split 60:40 in favor of the owner.
The charterer of the vessel, Navix Astral, holds a purchase option
denominated in yen to purchase the vessel. The purchase option reduces on a
sliding scale over the term of the related charter and is at a strike price that
is in excess of the related debt on the vessel. The option is exercisable at any
time after the end of the seventh year of the charter.
23. SUBSEQUENT EVENTS
In December 2003, Frontline agreed with its partner, Overseas Shipholding,
Group, Inc. ("OSG"), to reorganize their mutual interests in six associated
companies, which each own a VLCC. These agreements resulted in Frontline
exchanging its interests in the vessels Dundee, Sakura I and Tanabe for OSG's
interests in the vessels Edinburgh, Ariake and Hakata, thereby increasing its
interest in these vessels to 100.0% each. These exchanges were concluded in
February 2004. These interests have been allocated to Ship Finance in these
predecessor combined carve-out financial statements on the basis of Frontline's
historical interest in these associated companies.
SHIP FINANCE INTERNATIONAL LIMITED
INDEX TO STAND ALONE FINANCIAL STATEMENTS
Report of Independent Auditor F-29
Audited Statement of Operations for the period from
October 10, 2003 (Inception) to December 31, 2003 F-30
Audited Balance Sheet as of December 31, 2003 F-31
Audited Statement of Cash Flows for the period from
October 10, 2003 (Inception) to December 31, 2003 F-32
Notes to Financial Statements F-33
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors and Stockholder of Ship Finance International Limited.
In our opinion, the accompanying balance sheet and the related statement of
operations, cash flows and changes in stockholder's equity present fairly, in
all material respects, the financial position of Ship Finance International
Limited (the Company) at December 31, 2003 and the results of their operations
for the period from October 10, 2003 (Inception) to December 31, 2003, and its
cash flows for the period from October 10, 2003 to December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which required that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers DA
Oslo, Norway
6 February 2004, except for Note 12, for which date is 17 February 2004.
SHIP FINANCE INTERNATIONAL LIMITED
Audited Statement of Operations for the period from
October 10, 2003 (Inception) to December 31, 2003
(in thousands of $)
Operating expenses
Administrative expenses 14
---------
Total operating expenses 14
---------
Other income (expenses)
Interest income 199
Interest expense (2,122)
Net other income (expenses) (1,923)
---------
Net income (loss) (1,937)
=========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Audited Balance Sheet as of December 31, 2003
(in thousands of $)
ASSETS
Current Assets
Restricted cash 565,500
Other receivables 211
----------
Total current assets 565,711
----------
Deferred charges 16,481
----------
Total assets 582,192
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable -
Accrued expenses 4,015
Amount due to parent company 102
----------
Total current liabilities 4,117
Long-term liabilities
Long term debt 580,000
----------
Total liabilities 584,117
Commitments and contingencies -
Stockholders' equity
Share capital (12,000 shares of $1 authorized and issued) 12
Retained deficit (1,937)
----------
Total stockholders' equity (1,925)
----------
Total liabilities and stockholders' equity 582,192
==========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Audited Statement of Cash Flows for the period from
October 10, 2003 (Inception) to December 31, 2003
(in thousands of $)
Operating activities
Net loss (1,937)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of deferred charges 69
Other receivables (199)
Accrued expenses 2,063
Amount due to parent company 4
----------
Net cash provided by operating activities nil
----------
Investing activities
Net placement of restricted cash (565,500)
----------
Net cash provided by (used in) investing activities (565,500)
----------
Financing activities
Proceeds from long term debt 580,000
Debt fees paid (14,500)
Net cash (used in) provided by financing activities 565,500
Net increase (decrease) in cash and cash equivalents nil
Cash and cash equivalents at beginning of period nil
Cash and cash equivalents at end of period nil
==========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest nil
==========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Financial Statements
1. GENERAL
Ship Finance International Limited (the "Company" or "Ship Finance") was
incorporated in Bermuda on October 10, 2003 for the purpose of acquiring certain
of the shipping assets of its parent company, Frontline Ltd. ("Frontline").
Frontline is a publicly listed Bermuda based shipping company engaged primarily
in the ownership and operation of oil tankers, including oil/bulk/ore ("OBO")
carriers. The Company is a wholly owned subsidiary of Frontline. Frontline
operates tankers of two sizes: very large crude carriers ("VLCCs") which are
between 200,000 and 320,000 deadweight tons ("dwt"), and Suezmaxes, which are
vessels between 120,000 and 170,000 dwt. Frontline is a holding company which
operates through subsidiaries and joint ventures located in Bermuda, Isle of
Man, Liberia, Norway, Panama, Singapore, the Bahamas and Sweden.
On December 11, 2003 the Company entered into a purchase agreement with
Frontline to purchase certain of Frontline's wholly owned VLCC and Suezmax
owning subsidiaries, including certain subsidiaries acquired or expected to be
acquired through a reorganization of interests in certain joint ventures plus a
purchase option to acquire a further VLCC (together the "Vessel Interests").
On December 18, 2003 the Company issued $580 million of 8.5% Senior Notes
due 2013 in a private offering to Qualified Institutional Buyers. The proceeds
from this offering, together with a deemed equity contribution of approximately
$525 million from Frontline, will be used to complete the acquisition of the
Vessel Interests.
2. ACCOUNTING POLICIES
Basis of accounting
These financial statements are prepared in accordance with accounting
principles generally accepted in the United States.
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates and
assumptions affecting the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
For the purposes of the statement of cash flows, all demand and time
deposits and highly liquid, low risk investments with original maturities of
three months or less are considered equivalent to cash.
Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized
on a straight-line basis over the term of the relevant loan. The straight line
basis of amortization approximates the effective interest method in the
Company's statement of operations. Amortization of loan costs is included in
interest expense.
Financial Instruments
In determining fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives and long term debt, standard market conventions and
techniques such as options pricing models are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
The Company has no independent assets or operations from those if its
subsidiaries who have provided guarantees to its indebtedness. These guarantees
are full and unconditional and joint and several. All of the Company's
subsidiaries are guarantors.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of
Interpretation 45 has not had a material effect on the results of operations or
financial position of the Company.
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. A variable interest entity is a legal entity that
lacks either (a) equity interest holders as a group that lack the
characteristics of a controlling financial interest, including: decision making
ability and an interest in the entity's residual risks and rewards or (b) the
equity holders have not provided sufficient equity investment to permit the
entity to finance its activities without additional subordinated financial
support.. Interpretation 46 requires a variable interest entity to be
consolidated if any of its interest holders are entitled to a majority of the
entity's residual return or are exposed to a majority of its expected losses.
This party is referred to as the primary beneficiary.
In December 2003, the FASB issued FASB Interpretation 46(R), Consolidation
of Variable Interest Entities. FIN 46(R) replaces FIN 46 and clarifies the
accounting for interests in variable interest entities. The company will begin
to apply FIN 46 (R) to entities considered to be variable interest entities for
periods after December 31, 2003.
Management is currently considering the impact of FIN 46 (R).
4. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received written
assurance from the Minister of Finance in Bermuda that, in the event of any such
taxes being imposed, the Company will be exempted from taxation until the year
2016. United States The Company does not accrue U.S. income taxes as, in the
opinion of U.S. counsel, the Company is not engaged in a U.S. trade or business
and is exempted from a gross basis tax under Section 883 of the U.S. Internal
Revenue Code.
A reconciliation between the income tax expense resulting from applying the
U.S. Federal statutory income tax rate and the reported income tax expense has
not been presented herein as it would not provide additional useful information
to users of the financial statements as the Company's net income is subject to
neither Bermuda nor U.S. tax.
5. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are capitalized and
amortized on a straight-line basis to interest expense over the life of the debt
instrument. The deferred charges are comprised of the following amounts:
(in thousands of $) December 31, 2003
------------------- -----------------
Debt arrangement fees 16,550
Accumulated amortization (69)
----------
16,481
==========
6. ACCRUED EXPENSES
(in thousands of $) December 31, 2003
------------------- -----------------
Debt fees 1,961
Interest expense 2,054
----------
4,015
==========
7. AMOUNT DUE TO PARENT COMPANY
The amount due to parent company represents advances to the Company by
Frontline to fund payment of our start up costs and expenses incurred prior to
our issuance of Senior Notes. For the purposes of these financial statements, no
interest expense has been imputed on the balance due to Frontline.
8. DEBT
On December 15, 2003 the Company issued $580 million of senior notes. The
notes are governed by an Indenture dated December 15, 2003 among the Company and
Wilmington Trust Company, as trustee. The Indenture contains covenants that
restrict the ability of the Company, among other things, to incur additional
indebtedness, to pay dividends or make distributions of capital, to enter into
certain sale and leaseback transactions, to sell assets or capital stock of its
subsidiaries or to enter into transactions with affiliates. These covenants are
fully explained in the Prospectus to the notes issue and in the Registration
Statement that will be filed in connection with an Exchange Offer for the notes.
The notes:
o are general unsecured, senior obligations of the Company;
o are limited initially to an aggregate principal amount of $580
million;
o will mature on December 15, 2013;
o were issued in denominations of $1,000 and integral multiples of
$1,000;
o are represented by one or more registered notes in global form, but in
certain circumstances may be represented by notes in definitive form;
o rank equally in right of payment to any future senior indebtedness of
the Company but are effectively subordinated to all future secured
indebtedness of the Company, to the extent of the value of the
collateral securing such Indebtedness;
o the notes will be unconditionally guaranteed on a senior unsecured
basis by each subsidiary of the Company, but the guarantees will be
effectively subordinated to all present and future secured
indebtedness of the subsidiaries, to the extent of the value of the
collateral securing such Indebtedness;
o The notes are not redeemable prior to December 15, 2008 except as
described below. After that date the Company may redeem notes at
redemption prices which reduce from 104.25% in 2008 to 100% in 2011
and thereafter. Prior to December 15, 2006 the Company may redeem up
to 35% of the original principal amount using the cash proceeds of an
initial public equity offering at a redemption price of 108.5%; and
o are expected to be eligible for trading in the PORTAL market.
Interest on the notes:
o accrues at the rate of 8.50% per annum;
o accrues from the date of issuance or the most recent interest payment
date;
o is payable in cash semi-annually in arrears on June 15 and December
15, commencing on June 15, 2004;
o is payable to the holders of record on June 1 and December 1
immediately preceding the related interest payment dates; and
o is computed on the basis of a 360-day year comprised of twelve 30-day
months.
9. SHARE CAPITAL
The Company was incorporated on October 10, 2003 with authorized share
capital of 12,000 ordinary shares of $1.00 par value each. On that date, 12,000
ordinary shares of $1.00 par value each were issued to the initial shareholder,
Frontline Ltd.
10. FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2003 are as follows:
December 31, 2003 December 31, 2003
(in thousands of $) Carrying Value Fair Value
------------------- -------------- ----------
Non-Derivatives:
Restricted cash 565,500 565,500
Long term debt 580,000 580,000
The carrying value of restricted cash is a reasonable estimate of fair
value.
The estimated fair value for our long-term debt is considered to be equal
to the carrying value since the Company estimate that the market interest rate
for debt with similar terms to our debt is the same as the interest rate on our
debt.
11. COMMITMENTS AND CONTINGENCIES
Other Contractual Commitments
On December 11, 2003 the Company entered into a purchase agreement with
Frontline to purchase certain of Frontline's wholly owned VLCC and Suezmax
owning subsidiaries, including certain subsidiaries acquired or expected to be
acquired through a reorganization of interests in certain joint ventures plus a
purchase option to acquire a further VLCC (together the "Vessel Interests"). The
purchase price for the Vessel Interests is $950 million and is to be settled in
cash, net of a deemed equity contribution of $525 million by Frontline.
12. SUBSEQUENT EVENTS
On January 1, 2004 the Company completed the purchase of the Vessel
Interests it agreed to purchase from Frontline on December 11, 2003.
As a result of these transactions the Company has acquired a fleet of 24
Suezmax tankers and 23 VLCCs with a combined deadweight tonnage of
10,498,000,000 tones and a combined book value of approximately $2,107 million.
On January 1, 2004 the Company entered into time charter agreements with
Frontline Shipping Ltd., a subsidiary of Frontline, to charter the 46 vessels
for substantially the remainder of their useful lives at fixed rates.
On January 1, 2004 the Company entered into management agreements with
Frontline Management (Bermuda) Ltd., a subsidiary of Frontline, to manage the 46
vessels for substantially the remainder of their useful lives at fixed rates.
On February 17, 2004 the Company entered into a senior secured credit
facility agreement with a syndicate of banks with principal amount $1,058.0
million. This facility bears interest at LIBOR plus 1.25% payable quarterly in
arrears and may be prepaid without penalty. The principal amortization schedule
in respect of our senior secured credit facility, assuming that it is fully
drawn upon, will be as follows:
Amount
Year (dollars in millions)
---- ---------------------
2004 $93.7
2005 93.7
2006 93.7
2007 93.7
2008 93.7
2009 89.8
At maturity in 2010 499.7
INDEX TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Statement of Operations for the six months ended June
30, 2004 and Unaudited Predecessor Combined Carve-out Statement
of F-35 Operations for the six months ended June 30, 2003 F-35
Unaudited Balance Sheet as of June 30, 2004, Audited Predecessor
Combined Carve-out Balance Sheet as of December 31, 2003 and
Audited Balance Sheet as of December 31, 2003 F-36
Unaudited Statement of Cash Flows for the six months ended June
30, 2004 and Unaudited Predecessor Combined Carve-out Statement
of F-37 Cash Flows for the six months ended June 30, 2003 F-37
Unaudited Statements of Changes in Stockholders' Equity for the
six months ended June 30, 2004 and Unaudited Predecessor Combined
F-38 Carve-out Statements of Changes in Stockholders' Equity for
the year ended December 31, 2003 F-38
Notes to Unaudited Interim Financial Statements F-39
SHIP FINANCE INTERNATIONAL LIMITED
Unaudited Statement of Operations for the six months ended June 30, 2004
and Unaudited Predecessor Combined Carve-out Statement of
Operations for the six months ended June 30, 2003
(in thousands of $)
Predecessor
combined carve-out
------------------
Six months ended June 30
------------------------
2004 2003
---- ----
Operating revenues
Time charter revenues 47,264 10,456
Bareboat charter revenues. 19,305 14,007
Voyage charter revenues 49,750 377,126
Finance lease interest income 64,056 -
Finance lease service revenues 33,482 -
Profit sharing revenue 5,656 -
---------- ---------
Total operating revenues 219,513 401,589
---------- ---------
Operating expenses
Voyage expenses and commission 8,971 80,862
Ship operating expenses 48,377 38,625
Depreciation and amortisation 21,786 51,446
Administrative expenses 1,514 3,039
---------- ---------
Total operating expenses 80,648 173,972
---------- ---------
Net operating income 138,865 227,617
Other income (expenses)
Interest income 2,269 4,604
Interest expense (48,929) (18,931)
Share of results of associated companies - 15,538
Foreign currency exchange gain (loss) 117 301
Other financial items, net 13,990 (171)
---------- ---------
Net other income (expenses) (32,553) 1,341
---------- ---------
Net income 106,312 228,958
========== =========
Earnings Per Share - Basic and Diluted $1.44 $3.10
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Unaudited Balance Sheet as of June 30, 2004,
Audited Predecessor Combined Carve-out Balance Sheet as of
December 31, 2003 and Audited Balance Sheet as of December 31, 2003
(in thousands of $)
Predecessor
combined
carve-out
-----------
June 30, December December
2004 31, 2003 31, 2003
--------- --------- ---------
(audited) (audited)
ASSETS
Current Assets
Cash and cash equivalents 32,138 -- 26,519
Restricted cash. 7,886 565,500 --
Trade accounts receivable 3,634 -- 23,896
Other receivables 1,017 211 7,251
Inventories -- -- 16,248
Voyages in progress -- -- 34,916
Prepaid expenses and accrued income 6,312 -- 2,234
Amount due from parent company 55,254 -- --
Investments in finance leases,
current portion 65,411 -- --
--------- --------- ---------
Total current assets 171,652 565,711 111,064
--------- --------- ---------
Newbuildings and vessel purchase options -- -- 8,370
Vessels and equipment, net 518,479 -- 1,863,504
Investments in finance leases 1,417,480 -- --
Investment in associated companies -- -- 160,082
Deferred charges 27,953 16,481 4,304
Mark to market valuation of derivatives 9,442 -- --
Other long term assets -- -- 9,024
Total assets 2,145,006 582,192 2,156,348
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt and current portion of
long-term debt 88,843 -- 141,522
Trade accounts payable 284 -- 4,664
Accrued expenses 7,042 4,015 18,729
Mark to market valuation of derivatives -- -- 9,217
Other current liabilities 18,960 -- 10,936
Amount due to parent company -- 102 299,166
--------- --------- ---------
Total current liabilities 115,129 4,117 484,234
Long-term liabilities
Long term debt 1,465,431 580,000 850,088
--------- --------- ---------
Total liabilities 1,580,560 584,117 1,334,322
Commitments and contingencies
Stockholders' equity
Share capital 73,925 12 --
Contributed surplus 452,508 -- --
Retained earnings (deficit) 38,013 (1,937) --
Invested equity -- -- 822,026
--------- --------- ---------
Total stockholders' equity 564,446 (1,925) 822,026
--------- --------- ---------
Total liabilities and stockholders' equity 2,145,006 582,192 2,156,348
========= ========= =========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Unaudited Statement of Cash Flows for the six months ended June 30,
2004 and Unaudited Predecessor Combined Carve-out Statement of
Cash Flows for the six months ended June 30, 2003
(in thousands of $)
Predecessor
combined
carve-out
---------
Six months Six months
ended June ended June
30, 2004 30, 2003
---------- ----------
Operating activities
Net income (loss 106,312 228,958
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortisation 21,786 51,446
Amortisation of deferred charges 6,583 486
Share of results of associated companies -- (15,538)
Interest income, capitalised -- (3,684)
Unrealised foreign exchange (gain) loss (137) (2,792)
Change in accounting principle -- --
Adjustment of derivatives to market value (15,095) (2,325)
Release of accumulated other comprehensive
income to net income 1,052
Other (488) --
Changes in operating assets and liabilities, net
of effect of acquisitions:
Trade accounts receivable (3,634) (7,137)
Other receivables (776) (1,435)
Inventories -- 1,727
Voyages in progress -- (3,651)
Prepaid expenses and accrued income (6,112) (2,320)
Trade accounts payable 284 (389)
Accrued expenses 396 (4,049)
Other current liabilities 404 1,563
---------- ----------
Net cash provided by operating activities 109,523 241,912
---------- ----------
Investing activities
Acquisition of subsidiaries, net of cash acquired (536,793) --
for $1,061,793 net of an equity contribution
by parent company of $525,000
Investments in associated companies -- (348)
Net maturity (placement) of loans receivable -- 708
Net maturity of restricted cash 557,614 --
Repayments from investments in finance leases 26,653 --
Short-term loan advances to parent company (55,254) --
Repayment of other long term liabilities -- --
---------- ----------
Net cash provided by (used in) investing activities (7,780) 360
---------- ----------
Financing activities
Amount due to parent company (164,549)
Proceeds from long term debt 1,017,000 --
Repayments of long term debt (1,025,009) (72,130)
Debt fees paid (13,787) (970)
Deemed dividends (47,909) --
---------- ----------
Net cash (used in) provided by financing activities 69,605 (237,649)
---------- ----------
Net increase (decrease) in cash and cash equivalents 32,138 4,623
Cash and cash equivalents at beginning of period -- 20,634
Cash and cash equivalents at end of period 32,138 25,257
========== ==========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalised interest 44,687 19,622
========== ==========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Unaudited Statements of Changes in Stockholders' Equity for the
six months ended June 30, 2004 and Unaudited Predecessor Combined
Carve-out Statements of Changes in Invested Equity for the for
the year ended December 31, 2003
(in thousands of $)
Invested
equity
Balance at December 31, 2002 485,605
--------
Net income 334,812
Release of accumulated other
comprehensive income to net income 1,609
--------
Other comprehensive income (loss) 1,609
--------
Comprehensive income 336,421
--------
Balance at December 31, 2003 822,026
========
[Download Table]
Retained
Share Contributed Earnings
Capital Surplus (Deficit) Total
-------- -------- -------- --------
Balance at December 31, 2003 12 -- (1,937) (1,925)
Net income -- -- 106,312 106,312
Issue of new shares to parent company 73,913 (73,913) -- --
Equity contribution from parent company -- 525,000 -- 525,000
Deemed equity contribution -- 1,421 -- 1,421
Dividends declared -- -- (18,453) (18,453)
Deemed dividends (47,909) (47,909)
-------- -------- -------- --------
Balance at June 30, 2004 73,925 452,508 38,013 564,446
======== ======== ======== ========
See accompanying Notes that are an integral part of these Financial Statements
SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Unaudited Interim Financial Statements
1. General
Ship Finance International Limited ("Ship Finance" or the "Company"), a
subsidiary of Frontline Ltd (NYSE:FRO), was incorporated in Bermuda in October
2003 for the purpose of acquiring certain of the shipping assets of Frontline
Ltd. In December 2003, Ship Finance issued $580 million of 8.5% Senior Notes. In
the first quarter of 2004, Ship Finance used the proceeds of the Notes issue,
together with a refinancing of existing debt, to fund the acquisition of a fleet
of 47 crude oil tankers (including one purchase option for a VLCC) from
Frontline and has chartered each of the ships back to Frontline for most of
their remaining lives. Ship Finance also entered into fixed rate management and
administrative services agreements with Frontline to provide for the operation
and maintenance of the Company's vessels and administrative support services.
The charters and the management agreements were each given economic effect as of
January 1, 2004.
The Company was incorporated as a wholly owned subsidiary of Frontline. On June
16, 2004, Frontline completed the partial spin off of Ship Finance. Frontline
distributed 25 per cent of Ship Finance's common shares to Frontline's ordinary
shareholders with each Frontline shareholder receiving one share in Ship Finance
for every four Frontline shares held. On June 17, 2004, Ship Finance common
shares commenced trading on the New York Stock Exchange under the ticker symbol
"SFL".
2. Accounting Policies
Basis of Accounting
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The principal
accounting policies used in the preparation of these financial statements are
set out below. The balance sheet at December 31, 2003 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements.
These interim financial statements should be read in conjunction with the
audited predecessor combined carve-out and standalone financial statements and
accompanying notes included elsewhere in this prospectus
The interim financial statements include the assets and liabilities of the
Company and its subsidiaries and certain variable interest entities in which the
Company is deemed to be subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. All intercompany balances and transactions
have been eliminated on consolidation.
Comparative financial information in these interim financial statements has been
derived from our audited predecessor combined carve out and standalone financial
statements where appropriate.
For the year ended December 31, 2003 and the six months ended June 30, 2003, the
predecessor combined carve-out financial statements have been carved out of the
consolidated financial statements of Frontline. These combined financial
statements assume that our business was operated as a separate corporate entity
prior to its inception. The combined financial statements have been prepared to
reflect the combination of certain of Frontline's wholly owned VLCC and Suezmax
owning subsidiaries, interests in joint ventures and an option to acquire an
additional VLCC.
The predecessor combined carve-out financial statements were prepared in
contemplation of the fleet purchase transaction that occurred effective January
1, 2004 and reflect the Company acquisition from Frontline of certain wholly
owned VLCC and Suezmax owning subsidiaries, including certain subsidiaries
acquired through a reorganization of Frontline's interests in certain joint
ventures plus a purchase option to acquire a further VLCC (together the "Vessel
Interests").
The Company accounts for certain of the long term charters to Frontline as sales
type leases while the remaining charters will initially be accounted for as
operating leases. For those vessels on existing long-term charters to third
parties, the difference between amounts earned under those charters and the
amounts due to the Company by Frontline is remitted to Frontline and accounted
for as a deemed dividend which reduces stockholders' equity.
The preparation of financial statements in accordance with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues are
generated from freight billings, contracts of affreightment, time charter,
bareboat charter hires, finance lease interest income, finance lease service
revenues and profit sharing revenues. The operating results of voyages in
progress are estimated and recorded pro-rata on a per day basis. Probable losses
on voyages are provided for in full at the time such losses can be estimated.
Time charter and bareboat charter revenues are recorded over the term of the
charter as service is provided.
Finance lease service revenues represent services provided to the lessee to
operate vessels and are recognized on a daily accrual basis.
We recognize profit sharing revenues related to the profit sharing
agreement between the Company and Frontline Ltd. only when those revenues are
earned and realizable. We consider profit sharing revenues to be earned and
realizable to the extent that a vessel's underlying earnings on a time charter
equivalent basis exceed the profit sharing threshold for the profit sharing
period. This threshold is calculated as the number of days in the profit sharing
period multiplied by the daily profit sharing threshold rates, which are $21,100
per day for Suezmaxes and $25,575 per day for VLCCs, on a time charter
equivalent basis. Our profit sharing revenues are 20% of a vessel's underlying
earnings in excess of the threshold.
Cash and cash equivalents
For the purposes of the statement of cash flows, all demand and time
deposits and highly liquid, low risk investments with original maturities of
three months or less are considered equivalent to cash.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful lives.
The estimated economic useful life of the Company's double hull vessels is 25
years and for single hull vessels is either 25 years or the vessel's anniversary
date in 2015, whichever comes first.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate that
the carrying amount of an asset may no longer be appropriate. We assess
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's carrying
value and fair value. In addition, long-lived assets to be disposed of are
reported at the lower of carrying amount and fair value less estimated costs to
sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized
on a straight-line basis over the term of the relevant loan. The straight line
basis of amortization approximates the effective interest method in the
Company's statement of operations. Amortization of loan costs is included in
interest expense.
Leases
Thirty four of the long term charters with Frontline Shipping Limited ("the
Charterer") have been classified as a sales type leases in accordance with
Statement of Financial Standards No 13.
Accordingly, the minimum lease payments (net of amounts representing estimate
executory costs including profit thereon) plus the unguaranteed residual value
are recorded as the gross investment in the lease. The difference between the
gross investment in the lease and the sum of the present values of the two
components of the gross investment is recorded as unearned income which is
amortised to income over the lease term as finance lease interest income to
produce a constant periodic rate of return on the net investment in the lease.
Financial Instruments
In determining fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives and long term debt, standard market conventions and
techniques such as options pricing models are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
The Company has no independent assets or operations from those if its
subsidiaries who have provided guarantees to its indebtedness. These guarantees
are full and unconditional and joint and several. All of the Company's
subsidiaries are guarantors.
Derivatives
The Company enters into interest rate swap transactions from time to time
to hedge a portion of its exposure to floating interest rates. These
transactions involve the conversion of floating rates into fixed rates over the
life of the transactions without an exchange of underlying principal.
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133" and
SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133", requires an entity to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure these instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. In order to qualify
for hedge accounting under SFAS 133, certain criteria and detailed documentation
requirements must be met.
Earnings per share
Basic EPS is computed based on the income (loss) available to common
stockholders and the number of common shares outstanding on June 16, 2004, the
date on which the Company was partially spun off from Frontline. Diluted EPS
includes the effect of the assumed conversion of potentially dilutive
instruments. For all periods presented there are no potentially dilutive
instruments.
3. Investments in Finance Leases
Our vessels are chartered on long term, fixed rate charters to Frontline
Shipping Limited, a wholly owned subsidiary of Frontline ("the Charterer) which
will extend for various periods depending on the age of the vessels, ranging
from approximately seven to 23 years. The terms of the charters do not provide
the Charterer with an option to terminate the charter before the end of its
term, other than with respect to our non-double hull vessels after 2010.
In accordance with US GAAP, thirty four of these charters are accounted for as
sales type leases. The following lists the components of the investments in
finance leases as of June 30, 2004:
(in thousands of $) June 30, 2004
------------------- -------------
Total minimum lease payments to be received 3,288,539
Less: amounts representing estimated executory
costs including profit thereon, included in total
minimum lease payments (960,492)
-------------
2,328,047
Less: allowance for uncollectibles -
-------------
Net minimum lease payments receivable 2,328,047
Estimated residual values of leased property (unguaranteed) 392,611
Less: unearned income (1,154,145)
-------------
1,566,513
Less: deferred deemed equity contribution (see Note 8) (85,043)
Add: accumulated amortization of deferred deemed equity
contribution 1,421
-------------
1,482,891
-------------
Current portion 65,411
Long-term portion 1,417,480
=============
1,482,891
=============
At June 30, 2004, minimum lease payments for each of the five succeeding
years were as follows: $284,922 in 2005, $284,922 in 2006, $282,474 in 2007,
$279,404 in 2008 and $275,671 in 2009.
4. Vessels and Equipment, net
Predecessor
(in thousands of $) June 30, 2004 Combined Carve-out
------------------- ------------- ------------------
Cost 850,575 2,607,693
Accumulated depreciation (332,096) (744,189)
----------- -----------
Net book value at end of year 518,479 1,863,504
=========== ===========
Depreciation expense was $21.8 million and $51.5 million for the six months
ended June 30, 2004 and 2003 respectively.
5. Debt
The outstanding debt as of June 30, 2004 is repayable as follows:
Predecessor
Combined
Carve-Out Successor
June December December
(in thousands of $) 2004 2003 2003
------------------- --------- --------- ---------
8.5% Senior notes due 2013a 560,000 -- 580,000
US Dollar denominated floating
rate debt (LIBOR + 0.485% to 2.75%)
due through 2011 994,274 901,585 --
Yen denominated floating rate debt
(LIBOR + 1.125% to 1.3135%)
due through 2011a 89,830 --
Credit facilities -- 195 --
---------
Total debt 1,554,274 991,610 580,000
--------- --------- ---------
Less: short term and current
portion of long term debt (88,843) (141,522) --
---------
1,465,431 850,088 580,000
---------
(in thousands of $) June 2004
------------------- ---------
2004 88,843
2005 88,843
2006 88,843
2007 88,843
2008 and later 1,198,902
-----------
Total debt 1,554,274
===========
The weighted average interest rate for the floating rate debt denominated in US
dollars was 5.5411 per cent, 3.07 per cent, and 8.5% as of June 30, 2004,
December 31, 2003 (carve out basis), and December 31, 2003 (stand alone basis)
respectively. The weighted average interest rate for the floating rate debt
denominated in Yen was nil and 1.32 per cent as of June 30, 2004 and December
31, respectively. These rates take into consideration related interest rate
swaps.
Substantially all of the debt is collateralised by ship mortgages and, in the
case of some debt, pledges of shares by each guarantor subsidiary. Existing
financing agreements impose operation and financing restrictions which may
significantly limit or prohibit, among other things, the ability to incur
additional indebtedness, create liens, sell capital shares of subsidiaries, make
certain investments, engage in mergers and acquisitions, purchase and sell
vessels, enter into time or consecutive voyage charters or pay dividends without
the consent of our lenders. In addition, the lenders may accelerate the maturity
of indebtedness under our financing agreements and foreclose upon the collateral
securing the indebtedness upon the occurrence of certain events of default,
including failure to comply with any of the covenants contained in our financing
agreements. Various debt agreements contain certain covenants which require
compliance with certain financial ratios. Such ratios include equity ratio
covenants, minimum value clauses, and minimum free cash restrictions. As of June
30, 2004 and December 31, 2003, the Company complied with all the debt covenants
of its various debt agreements.
6. Related Party Transactions
We acquired all of our vessels from our parent company, Frontline Ltd, in a
spin-off transaction. We paid a total of $1,061.8 to Frontline being the book
value of assets transferred to us by Frontline less amounts of debt that we
assumed. As part of this spin-off transaction we also received an equity
contribution of $525.0 million from Frontline.
We charter all of our vessels to Frontline under long-term leases which were
given economic effect from January 1, 2004. In connection with these charters,
we have recognized the inception of net investments in finance leases of
$1,593.2 million, finance lease interest income of $64.1 million, finance lease
service revenues of $33.5 million, repayments of net investments in finance
leases of $26.7 million and deemed dividends of $47.9 million in the six months
ended June 30, 2004. At June 30, 2004 the balance of our net investments in
finance leases with Frontline was$1,566.5 million of which $65.4 million
represents short-term maturities.
We pay Frontline a management fee of $6,500 per day for all of our vessels, with
the exception of four of our vessels which are bareboat chartered resulting in
expenses of $48.4 million for the six months ended June 30, 2004. The management
fees have been classified as ship operating expenses.
We pay Frontline an administrative management fee of $20,000 per year plus
$20,000 per vessel per year. Based on our current fleet we will pay Frontline
$960,000 in 2004 under this arrangement and have incurred an expense of $480,000
for the six months ended June 30, 2004. These fees have been classified as
administrative expenses.
Frontline will pay us profit sharing payments of 20% of their earnings from
their use of our fleet above average daily rates of $25,575 for a VLCC and
$21,100 for a Suezmax for the 11 month period beginning February 1, 2004 and
each year thereafter. During the six months ended June 30, 2004, we earned and
recognized revenue of $5.7 million under this arrangement.
7. Share Capital and Contributed Surplus
Under our Amended Memorandum of Association, our authorized capital
consists of 125,000,000 common shares having a par value of $1.00 each, of which
75,525,837 are issued and outstanding.
We were formed in October of 2003 with an authorized share capital of
$12,000, divided into shares of $1.00 each. In connection with our partial
spin-off from Frontline in June 2004, our authorized share capital was increased
to 125,000,000 shares, each having a par value of $1.00, of which 73,925,837
were issued and outstanding immediately after the partial spin-off. In July
2004, we issued 1,600,000 common shares in a private placement for the price of
$15.75 per share. Immediately following our issues of these shares our total
outstanding shares were 75,525,837.
In connection with our purchase of our fleet from Frontline Ltd in January
2004, we received an equity contribution of $525.0 million.
As each of our vessels completes its original charter in place at January
1, 2004, the sales type leases with Frontline, entered into on January 1, 2004,
become effective for accounting purposes. The Company has accounted for the
difference between the historical cost of the vessel, originally transferred to
the Company by Frontline at January 1, 2004 at Frontline's historical carrying
value, and the net investment in the lease as a deferred deemed equity
contribution. The difference is presented as a reduction in the net investment
in finance leases in the balance sheet. This results from the related party
nature of both the original transfer of the vessel and the subsequent sales type
lease. The deferred deemed equity contribution is amortized as a credit to
equity over the life of the new lease arrangement as lease payments are applied
to the principal balance of the lease receivable. In the six months ended June
30, 2004 the Company has accounted for $1.4 million of such deemed equity
contributions.
8. Subsequent Events
On July 13, 2004, the Company completed the private placement of 1,600,000
common shares to an institutional investor at a purchase price of US $15.75 per
share. The Company is intending to use the total proceeds of $25.2 million to
expand the business.
On August 19, 2004, the Company declared a dividend of $0.35 per common
share to be paid on or about September 13, 2004.
On September 24, 2004, Frontline made a further distribution of
approximately 10% of its holding in the Company whereby each Frontline ordinary
shareholder received one common share in Ship Finance for every ten Frontline
ordinary shares held.
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 6. Indemnification of Directors and Officers.
Bermuda law permits the Bye-Laws of a Bermuda company to contain a
provision eliminating personal liability of a director or officer to the company
for any loss arising or liability attaching to him by virtue of any rule of law
in respect of any negligence default, breach of duty or breach of trust of which
the officer or person may be guilty. Bermuda law also grants companies the power
generally to indemnify directors and officers of the company if any such person
was or is a party or threatened to be made a party to a threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is or
was a director and officer of the company or was serving in a similar capacity
for another entity at the company's request.
The Company's bye-laws provide that no director, alternate director,
officer, person or member of a committee, if any, resident representative of the
Company or his heirs, executors or administrators (collectively an "indemnitee")
is liable for the acts, receipts, neglects, or defaults of any other such person
or any person involved in the formation of the Company, or for any loss or
expense incurred by the Company through the insufficiency or deficiency of title
to any property acquired by the Company, or for the insufficiency of deficiency
of any security in or upon which any of the monies of the Company shall be
invested, or for any loss or damage arising from the bankruptcy, insolvency, or
tortuous act of any person with whom any monies, securities, or effects shall be
deposited, or for any loss occasioned by any error of judgment, omission,
default, or oversight on his part, or for any other loss, damage or misfortune
whatever which shall happen in relation to the execution of his duties, or
supposed duties, to the Company or otherwise in relation thereto. Each
indemnitee will be indemnified and held harmless out of the funds of the Company
to the fullest extent permitted by Bermuda law against all liabilities, loss,
damage or expense (including but not limited to liabilities under contract, tort
and statute or any applicable foreign law or regulation and all reasonable legal
and other costs and expenses properly payable) incurred or suffered by him as
such director, alternate director, officer, person or committee member or
resident representative (or in his reasonable belief that he is acting as any of
the above). In addition, each indemnitee shall be indemnified against all
liabilities incurred in defending any proceedings, whether civil or criminal, in
which judgment is given in such indemnitee's favor, or in which he is acquitted.
The Company is permitted to purchase insurance to cover any liability it may
incur under the indemnification provisions of its bye-laws.
Item 7. Recent Sale of Unregistered Securities.
The following is a summary of the transactions by the registrant, since its
formation in October 2003, involving sales of the registrants securities that
were not registered under the Securities Act of 1933.
On December 18, 2003, the Company issued $580 million in principal amount
of senior notes, due 2013, in a private placement pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, as amended. The Company received
net proceeds from the issuance of the notes of approximately $560 million, which
was used to fund in part the acquisition of the Company's fleet of 46 tankers
and one newbuild option from Frontline. The issuance of the notes was
underwritten by Jefferies & Co and by Citigroup.
The Company commenced an exchange offer for the notes on May 25, 2004
pursuant to which 100% of the outstanding unregistered notes were exchanged for
identical notes registered under the Securities Act of 1933 pursuant to a
registration statement filed on Form F-4 filed with the U.S. Securities and
Exchange Commission. The exchange offer expired on July 26, 2004. We have
repurchased $25 million face value of the notes, which were subsequently
cancelled.
On July 14, 2004, the Company completed the private placement of 1,600,000
common shares to an institutional investor at a purchase price of $15.75 per
share. The Company is intending to use the total proceeds of $25.2 million to
expand its business.
Item 8. Exhibits and Financial Statement Schedules
Exhibit
Number Description
------ -----------
3.1 Memorandum of Association of Ship Finance International Limited
(Filed as Exhibit 3.1 to Ship Finance International Limited's
Registration Statement, SEC File No. 333-115705, filed on May 21,
2004)
3.2 Amended and Restated Bye-laws of Ship Finance International
Limited (Filed as Exhibit 3.2 to Ship Finance International
Limited's Registration Statement, SEC File No. 333-115705, filed
on May 21, 2004)
4.1 Form of Common Stock Certificate of Ship Finance International
Limited (Filed as Exhibit 4.1 to Ship Finance International
Limited's Registration Statement, SEC File No. 333-115705, filed
on May 21, 2004)
4.2 Indenture relating to 8.5% Senior Notes due 2013, dated December
18, 2003 (Filed as Exhibit 4.4 to Ship Finance International
Limited's Registration Statement, SEC File No. 333-115705, filed
on May 21, 2004)
5.1 Opinion of Mello, Jones & Martin regarding Bermuda law
10.1 Form of $1.058 billion Credit Facility (Filed as Exhibit 10.1 to
Ship Finance International Limited's Registration Statement, SEC
File No. 333-115705, filed on May 21, 2004)
10.2 Fleet Purchase Agreement dated December 11, 2003 (Filed as
Exhibit 10.2 to Ship Finance International Limited's Registration
Statement, SEC File No. 333-115705, filed on May 21, 2004)
10.3 Form of Performance Guarantee issued by Frontline Ltd. (Filed as
Exhibit 10.3 to Ship Finance International Limited's Registration
Statement, SEC File No. 333-115705, filed on May 21, 2004)
10.4 Form of Time Charter (Filed as Exhibit 10.4 to Ship Finance
International Limited's Registration Statement, SEC File No.
333-115705, filed on May 21, 2004)
10.5 Form of Vessel Management Agreements (Filed as Exhibit 10.5 to
Ship Finance International Limited's Registration Statement, SEC
File No. 333-115705, filed on May 21, 2004)
10.6 Form of Charter Ancillary Agreement (Filed as Exhibit 10.6 to
Ship Finance International Limited's Registration Statement, SEC
File No. 333-115705, filed on May 21, 2004)
10.7 Form of Administrative Services Agreement (Filed as Exhibit 10.7
to Ship Finance International Limited's Registration Statement,
SEC File No. 333-115705, filed on May 21, 2004)
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries (Filed as Exhibit 21.1 to Ship Finance
International Limited's Registration Statement, SEC File No.
333-115705, filed on May 21, 2004)
23.1 Consent of PricewaterhouseCoopers Hamilton, Bermuda
23.2 Consent of PricewaterhouseCoppers Oslo, Norway
23.3 Consent of Mello, Jones & Martin (included in its opinion filed
as Exhibit 5.1)
23.4 Consent of Seward & Kissel LLP with regard to United States and
New York law
Item 9. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Bermuda, on the 27th
day of September, 2004.
SHIP FINANCE INTERNATIONAL LIMITED
By: /s/ Tor Olav TrOim
Name: Tor Olav Tr0im
Title: Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary J. Wolfe and Robert E. Lustrin, or either of
them, with full power to act alone, his or her true lawful attorneys-in-fact and
agents, with full powers of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing necessary to be done, as fully for all
intents and purposes as he or she might or could do in person hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute,
may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities indicated.
Signature Title Date
--------- ----- ----
/s/ Tor Olav Tr0im Chairman, Chief Executive
Officer, President and Director September 27, 2004
/s/ Tom E. Jebsen Chief Financial Officer
and Vice President September 27, 2004
/s/ Kate Blankenship Chief Accounting Officer,
Secretary and Director September 27, 2004
/s/ Puglisi & Associates Authorized Representative
in the United States September 27, 2004
23153.0001 #511657
Dates Referenced Herein and Documents Incorporated by Reference
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